Q I need to obtain clarity on whether I would pay capital gains tax on purchasing a property using a bridging loan whilst I’m in the process of selling a second home.
I own a small flat that is on a long-term rental while my main home is a flat in a popular area of London and is on the market for £450,000. It is located in an area that continues to show buoyancy with neighbouring properties selling quite quickly.
However, I’ve found a property that I wish to buy and have made an offer of the full asking price of £230,000, subject to selling mine. If in the meantime, I took a bridging loan in order to secure the property whilst my main home is being sold, would I be liable to pay capital gains even though it was during a short transitional period of buying and selling, as on paper I would be classed as owning three properties, albeit briefly? DM
A The number of properties you own has no direct effect on the potential capital gains tax (CGT) bill. What matters is the nature of the property. As you are selling the flat that is your main home – and assuming that you have lived there for the whole time you have owned it – there will be no CGT to pay because you will be eligible for what’s called ‘private residence relief’ which makes any gain on a home you have lived in tax free.
There would, however, be a CGT bill if instead you sold the flat that you have been renting out because any gain made on a property that was not your main home does not qualify for private residence relief and so is taxable.
The tax that you do need to worry about if you have multiple properties is stamp duty land tax (SDLT) as a higher rate of SDLT can be applied to the purchase of more than one property.
In your case, if you do decide to get a bridging loan to buy the £230,000 property before selling the flat that is your main residence, the higher rates – which are 3% above the standard rates – will have to be paid. But provided you sell your old flat within 36 months of buying the new property, you’ll be able to claim a refund of the difference between the standard and higher rates of SDLT.
You could avoid being temporarily out of pocket by selling your current flat before buying the new property or by selling and buying on the same day. That’s because the higher rates do not apply if you sell a main residence and replace it with a new main residence.
If the £230,000 property is not going to be your new main residence, the higher SDLT rates will apply and you won’t be able to get a refund of the tax.
