Time for a change!
I have put my home on the market.
For anyone who may be interested I have lived in my apartment overlooking Hyde Park with roof top views of Harrods, Wembley, the Shard and Kensington Palace for over twenty years, so it is a big step. But over the twenty years I have lived here the increase in value has equalled what I have earned pound for pound as a leading lawyer, but whereas I have had to pay tax on my income the gain on the increase in the value of my home is tax free!
House prices may have stagnated over the last five years but according to my estate agent (who is supported in his contention by the Halifax House Price Index) house prices have rocketed over the past year, with average growth of 9.7% - which is above the rate of inflation forecast to hit a generational high of 7.25%.
Because of the relief from capital gains tax on a main and only residence I have always bought the most expensive home I can afford, which has on occasions been a dampener on my lifestyle but now with the children grown up I am keen to cash in, pay off my mortgage and start to look at rising interest rates as a good thing – not an expense. – But just because house prices are rising and the increase in value is tax free – is not to assume capital gains tax on homes is easy – there are many twists and turns and over the years I have seen many fingers burned….
For a start, the increase in value of your home is calculated over the time you have owned it. One of my clients many years ago went to live abroad and rented out his home while he did so. He just assumed that if he resumed residence before he sold it, the whole gain would escape capital gains tax. He was alarmed therefore to discover that only part of the gain – while he was living in the home fell out of the charge to tax the rest was fully chargeable.
In this case my client had lived abroad for more than five years so if had taken advice while he was abroad rather than when he returned, he could have sold his home tax free. Non-UK tax residents don’t pay UK capital gains tax if non-UK tax resident for 5 years. Getting these little twists and turns right can save a huge amount of tax
Another unfortunate client of mine, many years ago decided to swap homes with his parents who lived in the main home on the family estate whereas he and his family lived in the lodge – it made sense so they just swapped. They thought little more about it until both my client and his father decided to sell the whole estate at which point, they discovered that the gain made on both the main home and the lodge did not qualify for main and only property relief from capital gains tax since neither my client or his parents lived in the property which they owned.
In another unfortunate case, a client of mine bought two homes, both in London and he elected to have the larger home (with potentially the most gain) as his main residence. However, over time, he allowed his son to live with him in the larger home and in due course the son moved in with his family but did not give his son ownership of the property. When it came to preparing a succession plan HMRC refused to accept that the home in which his son lived was a ‘residence’ of his and denied main residence relief.
Then there is the tricky issue of living in the property until you die. There is no relief from tax on your home from inheritance tax. There may be a capital gains tax uplift on death, but your estate will be clobbered for 40% inheritance tax if the value of your estate is above the nil rate band of £325,000.
One of my clients decided to sell her expensive home in home in Mayfair which she had lived in for thirty years, move into a rented home and reinvest the proceeds in AIM shares which qualified for 100% business property relief after just two years. She lived for a further five years and her entire estate which was considerable avoided 100% inheritance tax on her capital investments.
In this case my client was more than happy to sell her Mayfair home and move into rented accommodation, which was smaller and well managed, however not all elderly people are prepared to give up what is familiar and comfortable to benefit their kids by saving tax – and at the end of the day it is their money and the interests of the next generation is only in ‘spes’ – hope!
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