Make your investment property your HOME!
If you make your investment property your primary residence, then you will benefit from a whole raft of tax reliefs that can ULTIMATELY absorb ALL your tax liabilities.
There are two ways to achieve this.
a) Live in the property before you let the property.
This is what the really smart investors have been doing, especially those who want to buy just one or two investment properties and gradually grow a portfolio.
This is an excellent tax strategy as you do not have to pay CAPITAL GAINS TAX on the last three years that you owned the property.
This is regardless of how much the property price has increased during that period.
To put it SIMPLY:
If you buy a property, live in it for two years, and then rent it out for the next three years, you have a ZERO capital gains liability!
AND this is regardless of how much money YOU make.
All you are doing here is legitimately exploiting ‘Private Residence Relief’!
b) Let the property, and then live in it before you sell it!
This strategy is, again, really for those people who are looking to grow relatively small portfolios over a period of time.
And again, all you are doing here is exploiting the ‘Private Residence Relief’ rule.
The only difference is that you are living in the property after it has been let.
Here are a couple of short case studies.
John, a higher-rate taxpayer, buys a property in April 1999 for £90,000 and rents it out for two years before moving into it for one year.
He then sells it, after he has completed three years of ownership, for £160,000.
Here there is no capital gains tax to pay as the last three years of ownership are exempt from tax!
So, John has £70,000 to spend however he likes!
Had he not lived in the property for a year, he would have been subject to a maximum £28,000 in tax…………OUCH!
Joanne buys a property in 1997 for £70,000.
She lives in the property for three years before she meets her husband-to-be and moves in with him in 2000.
She rents her property for the next three years and then decides to sell it in 2003 for £150,000.
AGAIN, Joanne has absolutely NO tax liability.
This is because the three years that she lived in the property are exempt from tax as it was her ‘main residence.’
In addition to this exemption, the last three years that she rented out the property are ALSO exempt.
This means that she has a WHOPPING £80,000 cash lump sum to do with as she pleases.
In this strategy I have only talked about one relief—the MOST POWERFUL ‘Private Residence Relief.’
About Arthur Weller
Arthur Weller is a Chartered Tax Advisor (CTA) and an integral part of the Property Tax Portal team. He offers a special rate tax advisory service on any aspect of UK taxation, including property taxation, for as little as £87 for a 30 minute telephone tax consultation.
To learn more about this service click here.