Tax Tip 17 : How to reduce capital gains tax if you own a buy-to-let property

Around 1 in 10 taxpayers in the UK own a second property, such as a buy to let investment or a holiday home.

Under current HMRC rules, Capital Gains Tax is due on the profits when you sell your buy to let property at either 18% or 28% depending on your total income from all sources on that tax year.

If you own a buy-to-let property, you could save a substantial amount of money by using it as your main home (or Principle Private Residence) at some point. You would not be liable for capital gains tax for the duration that the property was your main residence and for the last three years of ownership. The latter is covered by, what is called, the “’36-month rule”.

A common strategy that is used by property investors is to this. When they buy a new property, they rent out their existing private residence and then move into the new one; thereby taking advantage of the 36-month rule. Alternatively they move from their family home into the rental property prior to selling that rental property, again taking advantage of the 36 month rule.

But, before you move into your second property, remember that you must live in the property for a significant period of time. There are no HMRC rules on the time limit, but accountants recommend at least one year. You must have occupied the property properly as a family home and will need proof of residence, such as bank statements, postal details and electoral details which are all registered to the new address.

Also, note that you have a time limit in which you can nominate which property is to be your main residence. Within two years of buying a second property, you can choose which property is to be your main residence and you don’t have to be living in it at the time. But after two years, you do lose the right to nominate which property is your principle residence.

Remember that if you do move into your second property, your other home could then be liable for capital gains tax for that period, but if you do return to your main residence, you will be entitled to a further three-year (maximum) entitlement to PPR relief, in addition to the 36-month rule.

This is a complex issue, so professional advice should be sought from your accountant.

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