Principal Private Residence Relief - More Than One Residence
Taxpayers who own more than one property (UK or overseas) used as a home for themselves (i.e. this relief does not apply to properties exclusively let by the taxpayer to third parties) have a number of tax issues to consider in respect of the potential capital gains tax on a disposal of any of those residences.
This article reviews the practicalities of owning more than one residence and what tax planning is available to mitigate any potential capital gains liability.
What is a qualifying residence?
Such a residence is a property in which an individual lives as a home with some degree of expected permanence. Occupation does not have to be continual such that it is possible to have more than one qualifying residence available at any one time. The residence does not have to be owned by the individual.
Certain periods of long term non occupation (providing there is no other qualifying residence at the same time), in particular when the taxpayer resides in job related accommodation (up to four years), is working overseas (unlimited periods) or for any other reason (up to three years) are ignored. Short term periods of non occupation, for instance in respect of holidays, are also ignored and the last thirty six months ownership of any residence which has qualified for relief at some point in time always qualifies for relief for that last thirty six months.
If a property is acquired with the intention of renovating it and selling it on quickly for a profit, HM Revenue & Customs may seek to deny principal private residence relief. Moving into a property while it is being marketed for sale is also unlikely to make that property a qualifying residence. It is even possible for HMRC to seek to tax any such gains as income (rather than capital gains) although this is unlikely for one property renovation and sale. If an individual carries out a serial number of property purchases, renovations and sales, a liability to income tax (and Class2/4 National Insurance contributions) will almost certainly arise.
More than one residence
As detailed above it is possible to acquire more than one residence. The obvious examples of this are a holiday home (as long as it is used as a residence at some point from time to time) or a residence near a place of work.
Once it is established that there is more than one qualifying residence, it is necessary to establish which residence qualifies for principal private residence relief. Only one residence can qualify for principal private residence relief at any point in time. Husbands and wives (or civil partners) living together can only have one qualifying residence between them. If no election is made (see below) then relief is given to the principal (main) residence based upon the facts of the case.
Electing to designate the principal residence
The default principal residence may not be the most tax efficient choice. The election can only be made within two years of a change in circumstances. The election can be varied at any time, once made, and is valid as long as there is no further change in circumstances.
On the acquisition (or within two years thereafter) of a further residence (or disposal of a residence as long as at least two residences remain), it is likely to be worthwhile to elect (if no such election has previously been made) to make the residence that will not otherwise qualify for principal private residence relief the elected principal residence. It is then possible to vary the election shortly (say a month later) thereafter and reinstate the original residence as the elected principal residence. The effect of this election is to exempt one month and the last three years of any gain on the second residence from capital gains tax, at the cost of one month’s loss of relief on the principal residence. There is HMRC guidance on this strategy.
If a non UK domiciled taxpayer has a residence outside the UK, care needs to be taken in respect of any election or default position as any gain on the foreign residence may not be taxable in the UK if the remittance basis is being used.
An election must be in writing, signed by the individual (and, if relevant, their spouse or civil partner) and sent to the tax district of the individual (and that of their spouse or civil partner, if different). Note that the validity of any election will only be considered if tax is at stake.
In certain circumstances a transfer between spouses and civil partners can be beneficial. The rules in this respect are complex and specific advice to suit individual circumstances will be needed.
A major consideration in whether or not to make an election (other than for a short period as outlined above) is the potential appreciation in value of each residence, the likely gain that will arise on each, and whether any residence is likely to be sold in the foreseeable future in particular the next three years.
Lettings Relief
Again once a residence has been a principal private residence (even if only for a very short period via an election as detailed above) at some time a supplementary relief can be available to exempt certain gains attributable to periods when the property was let.
Summary
Practical advance planning in this situation can have a major beneficial impact on the amount of capital gains payable.