Colin Barratt of Wheawill and Sudworth explores capital gains tax issues for property owners

 

It is taken for granted that any gain on the sale of your home is exempt from Capital Gains Tax (CGT).

For those who have just one home and have used it as such throughout its period of ownership that will always be the case.

CGT exemption also applies to the last 18 months of ownership (previously three years for disposals made prior April 6, 2014) where, for example, they have moved out of the property and have bought another residence.

Some people may have more than one home, for example, a weekend home and a weekday home near work or they may have a holiday home. As an individual or a married couple can only have one home at a time then all the properties cannot all be exempt from tax as their private residence.

Where you have more than one home it is currently possible to elect which of your homes is to be treated as your main residence for CGT purposes.

Such an election must be made within 24 months of acquiring a different number of residences. So if you buy a holiday home you would need to make an election as to which of the homes is your private residence within 24 months of that acquisition.

The ability to make a main residence election can bring important tax benefits, for example, you elect for the holiday home to be your private residence with effect from September 1, 2014, and then you make another election to change it back to your main home from 8 September ,2014.

The result is that the holiday home is your private residence for just one week and your main home is your private residence throughout ownership apart from one week. The effect of this on the main home is negligible and any gain should still be completely exempt as one week’s worth of the gain will be insignificant.

For CGT purposes, the gain accruing on the sale of the second home will now be exempt for 18 months out of the total period of ownership. So if it is owned for just six years then 25% of any gain would be exempt. Without the election all the gain would be taxable.

The ability to make a what is commonly known as a “flipping” election has courted controversy over recent years due to the MP’s expenses scandal and proposals are afoot to abolish the right to nominate a person’s main residence from April next year.

Instead, an individual’s main residence for CGT purposes will be determined by looking at all factors such as the address where a person and their spouse or family lives, where mail is sent to and the residence at which they are registered with their GP or to vote. This is essentially what happens now where a main residence election has not been made.

An alternative proposal is to identify a person’s main residence by for instance looking at the property in which they have been present the most for any given tax year.

Whichever proposal is adopted as an alternative to making a main residence election, it is likely to lead to more detailed records having to be kept to identify which residence is the main one.

Until the new rules are announced and fully implemented, a main residence election remains available and it is important to review your circumstances to ensure that such an election is made wherever possible as it is unlikely that any new rules will be retrospectively applied.

 

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