Q When I moved from Edinburgh to London for a job ten years ago I kept my flat in Edinburgh and rented it out.
I was recently made redundant, but luckily I have found a new job in Glasgow, although I will have to commute to there from Edinburgh until I buy a flat in Glasgow. At the moment, I plan to keep the flat in London and rent it out but I will need to sell my flat in Edinburgh and am worried about the capital gains tax (CGT) on this as I haven’t lived there for a decade. would you suggest that I invest my entire redundancy pay in the new flat by paying off a chunk of my mortgage or
should I invest it elsewhere and transfer my existing mortgage?
A If you sell your only or main residence (and meet the various tests set out in the legislation) any gain made should be exempt from CGT. This is known as principal private residence relief (PPR). This can become a complex area of tax planning when, like you, the individual owns more than one property.
First, I am assuming that you have owned your current London property for more than two years and have not made a PPR election to tell HM Revenue & Customs whether the London or the Edinburgh property should be treated as your main residence. Making such an election within two years of purchasing an additional property is almost always advisable (and is possible provided that you have actually lived in both properties at one time) as it can be varied at a later date without any need to actually change which one you live in. You will be able to make this election once you buy in Glasgow and should get specialist advice at that time to confirm that you should do so.
Assuming that you have not made such an election, I would suggest that you consider very carefully whether it will be better financially for you to sell the property in Edinburgh or the property in London. Currently the Edinburgh market appears to be a little more buoyant than the London market and even without having an election in place, you could be eligible for an element of PPR and let property relief on the Edinburgh property which may wipe out any gain. However, in relation to the London property, assuming you have lived in the flat for the entire time you have owned it, you will be entitled to full PPR. It would be sensible to ask a specialist in this field to complete detailed comparative CGT calculations for the Edinburgh and London flats based on your specific circumstances and to seek property market advice from specialists in both cities before you make a decision on which to sell.
PPR relief is a powerful exemption that ensures a capital gain on the sale of a property is not chargeable to CGT, subject to meeting the statutory tests. However, it is also true that if a loss is made when a property is sold, that loss will not be available to offset gains arising on other assets. If you envisage any large taxable gains on other assets you own or anticipate some in the future, you’ll need to make sure you break the rules for PPR and do not qualify.
PPR relief continues to be one of the most generous reliefs available to shelter taxpayers from a CGT liability. However, the legislation is not always clear and each individual case must be carefully considered. In all cases, it is beneficial to consider the various issues well in advance of a proposed sale/purchase and involve specialist advisers. In terms of the redundancy payment, the first 30,000 is tax free and thereafter you pay income tax. If you have a tax liability this could possibly be reduced/negated by making a pension contribution (assuming that you are a higher-rate tax payer).
Whether or not you should be investing or paying off your mortgage depends on a number of factors, but most importantly your own attitude to risk. My personal opinion is that reducing debt in the current climate is not a bad idea.
Due to the current economic problems interest rates are likely to come down.
No doubt the value of shares will rise over time but it may be a while before this recovery takes place. If in doubt I believe I would lean towards reducing debt.
• Glen Gilson is head of private client & financial services at HBJ Gateley Wareing
• If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: . These answers are for guidance only. No responsibility for loss occasioned by any person acting, or refraining from acting, as a result of these answers can be accepted by The Scotsman Publications Ltd