‘How can we offset the £190,000 gain from selling our second home?’

QWe live in Devon, and 10 years ago my wife and I used our savings to buy a second home in the Midlands, to be closer to our new grandchildren.

As the children move into their teenage years, we intend to sell the second home which has never been let or used as our main home.

We are aware that capital gains tax will be payable on the gain that the property has made, but I believe that the capital losses of £ 110,000 that I incurred in my business more than 25 years ago can still be used to offset some or all the gain.

We are “joint tenants” which means, I think, that we both own the property equally. We anticipate that after all costs our gain will be about £190,000.

I have put the figures into HM Revenue and Customs’ CGT calculator (which assumes that all gains/costs are split equally) and it suggests that I would still be carrying forward losses, while my wife would be liable for a tax charge of almost the same amount.

If these figures could be offset against each other, would there be any tax payable to HMRC? Can I use all my losses against all the gains?

If so, how do we go about this? In a previous article you outlined the procedure for reporting tax due on capital gains, which requires the use of form PPDCGT, and payment of any tax due within 60 days.

Would this also trigger a requirement for both of us to complete self-assessment tax returns? We are both pensioners with incomes just over our personal allowances. We have not been required to complete self-assessment tax returns for many years, and we do not relish having to go back into the system just for this “one-off” event.

– John

Dear John

AI usually meet your situation in reverse, with people living in the Midlands buying a holiday home in Devon. However, I can well understand why you wanted this second home close to your grandchildren. Children grow up quickly and grandchildren seem to grow up even faster – any time spent with them is precious.

As matters stand you will each make a capital gain of £95,000. From April 5, you will each have a £ 3,000 annual CGT exemption. In your case, you can set £ 92,000 of your brought-forward capital losses against your share of the gain, so that the £3,000 allowance is not wasted, and allow the balance of £18,000 to carry forward.

Your wife will, however, be caught for tax on her gain of £92,000 taxable at 18pc up to her basic rate limit, and 28pc thereafter (24pc from April 6), being tax of almost £22,000.

The position would be improved if your solicitor prepared a declaration of trust, with you beneficially entitled to about 80pc of the property and your wife the remaining 20pc.

Your share of the gain at £152,000 would be reduced by all your brought- forward losses to leave £42,000, or £39,000 after the £3,000 annual exemption. Your wife would have a gain of £ 38,000, or £ 35,000 after the exemption.

You would need to fine-tune the exact split required using your actual incomes, but this would keep virtually the whole gain for each of you within the basicrate tax band. I estimate that your overall tax saving would be about £8,600. The calculations above assume that you have no relief from CGT on your second home, but that may not be the case.

Where you have two homes, the rules allow you to make an election as to which is to be treated for Principal Private Residence (PPR) relief as your primary residence, regardless of which is your main residence in practice.

A home which has been your PPR at any time will qualify for an exemption for the final nine months of ownership, calculated on a time-apportionment basis. This can open the opportunity to make an election for your second home to be your PPR for perhaps one month, but for you to qualify for nine months of relief and only expose one month of your actual main home to a taxable gain.

The catch is that you would both have had to make an election with HMRC that your Devon home was your main home within two years of buying your second home. If made, such an election can subsequently be varied to give the nine-month relief. I am not sure whether you were advised to do this.

As you noted from my previous article, there is now a requirement to report capital gains on UK property to HMRC and pay any tax due within 60 days of completion.

This can be performed online through the government gateway or by submitting form PPDCGT. Unfortunately, this all works independently of the self-assessment system, and it may be necessary to complete both.

I appreciate that you would prefer to stay out of self-assessment. My suggestion is that after you have sold the property you write to HMRC, explain that this is a one- off gain which you have already reported and paid the tax due, and ask whether they still require you to file a self-assessment.

‘The position would be improved if your solicitor prepared a declaration of trust’

Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired