Re­lief at hand if you can declare sec­ond prop­erty is your home

Yorkshire Post - Property - - PROPERTY - Richard White­lock

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

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