Relief at hand if you can declare second property is your home
AN increasing number of people now own a second property as an investment asset, let out to provide additional income and hopefully give longer term capital growth. But it may also be a second home, which can lead to some opportunities to save paying Capital Gains Tax (CGT) on eventual sale.
Such second homes may be a necessity for work purposes, with the owner spending the working week in the property to avoid a lengthy commute, or they may be holiday homes for the family to enjoy weekends and summer breaks, whether in the UK or overseas.
CGT is ordinarily chargeable on the profit made on the sale of most properties, with buy-to-let properties being a common example. However, properties that are occupied as your home can be wholly or partly relieved from tax thanks to the “Principal Private Residence” (PPR) relief.
Any property that qualifies as your main residence at some time will attract the PPR relief, which shelters certain periods of occupation of the property from tax.
These can be periods of actual occupation and qualifying “deemed” occupation (which can include periods of nonoccupation due to having to live elsewhere for employment purposes). It also removes from charge the last three years’ ownership in calculating any gain, whether you are living there or not.
You can only have one qualifying main residence at any given time, which could mean that one home may be fully chargeable to CGT while the other is fully relieved. So what can be done to save tax if you have two homes?
Under the PPR rules, you are able to nominate which property is to be classed as your main residence for tax purposes. Married couples living together can only have one qualifying main residence between them, so it is not possible for each spouse to nominate different homes.
The nomination must be made by formal notification to your tax office within two years of first residing in the second home (not necessarily first purchasing). Once made, this election can be changed and backdated by up to two years, which can be done after you have sold one of the two homes. This can often lead to some useful tax planning opportunities.
If you acquire a second home and do not make a formal nomination within the two-year time limit, your main residence will be decided by the Revenue as a question of fact.
This may not be to your advantage if that property has the smallest gain, so it is
Married couples living together can only have one qualifying main residence.
important to consider making a nomination.
Let us consider an example to illustrate how the use of a PPR nomination may be helpful for tax purposes:
An individual has owned and occupied two homes for many years, a house in Leeds and a flat in London. They made an election at the time they purchased the second home in London that the Leeds property was their qualifying main residence, for the avoidance of doubt.
The London flat is sold for a large gain in February 2010, and on April 15, 2010 they notify their tax office that the London flat is to be classed as their main residence with effect from April 15, 2008. On April 22, 2010 they notify the tax office that the Leeds property be classed as their main residence again with effect from April 22, 2008.
These elections enable this individual to obtain PPR relief for the last three years’ ownership on the London flat, at the small expense of having one chargeable week on the Leeds house.
If the gain made on sale was £100,000 and the flat was owned for, say, six years, these elections will have sheltered £50,000 (£100,000 x 3/6) of the gain from CGT, with a potential tax saving of £9,000.
Wherever there are two homes, careful planning with the PPR election can produce significant tax savings, provided that both properties are classed as qualifying main residences at the same time.
In situations of two residences, it is important to ensure that the final three years’ ownership is relieved from tax on both residences at the very least.
Furthermore, where PPR relief is available, there is an additional relief which can exempt from tax periods when the property was let out (subject to certain limits), which can lead to more tax saving opportunities, and in some instances relieve any remaining gain from CGT altogether.
CGT on properties can be a complex area, and the PPR nomination is an essential tool for those with more than one home.
It is always recommended that you seek professional advice on such issues to ensure that your properties are held as tax efficiently as possible.
Richard Whitelock is personal tax manager at Garbutt & Elliott, chartered accountants and tax advisers with offices in Leeds (telephone 0113 273 9600) and York (01904 464100), www.garbutt-elliott.co.uk