Can we avoid the taxman?

Q In 2002 my partner and I arranged to buy a property with my parents, who are semi-retired. They would live in the house, and we would be on the property ladder. They paid the deposit and costs and now pay £460 towards our £469-a-month buy-to-let mortgage. We are now looking to sell the house within the next two years, and buy one for ourselves (my parents plan to rent elsewhere). I complete annual tax returns because of the buy-to-let mortgage.

Can we avoid paying capital gains tax by living in the property for 12 months prior to selling? Is this necessary? Alternatively, we wondered if we remortgaged, changing the named borrowers to include one of my parents, we might be exempt? Are there any other ways we can avoid paying capital gains tax?

PG

A My understanding is that the property is owned by you and your partner and is in your joint names. You are basically letting the house to your parents and presumably are declaring the income received to HM Revenue & Customs, although this is being offset by the cost of the mortgage. As you are letting the property it cannot be claimed to be your principal residence and will, therefore, be liable to capital gains tax in the event of a sale.

If you move into the house, and inform the Revenue that it is your principal residence, then you will reduce the potential capital gains tax bill. The longer you officially live there the better, since the capital gains tax chargeable will be apportioned between the time you live there and the period for which it was let.

Changing the named borrowers on the mortgage would make no difference to the ownership of the property. If you remortgage, you might lose the eligibility to claim tax relief on the loan interest. I don't know how much the value of the property has risen, if at all, since 2002. However, bear in mind that both you and your partner have an annual capital gains exemption of £8,500 each, which means that as long as you haven't made any other taxable gains this year, you could make a profit of £17,000 on the sale without paying tax.