Second homes – the capital gains tax implications of being a part-time occupier?

Christina Nawrocki FCCA explains the changes to the tax rules on the sale of second properties.

The government has published proposals to overhaul capital gains tax (CGT) on the profits generated on residential properties. This will affect UK home owners with more than one property and relates to the operation of principal private residence relief (PPR) whereby CGT has been exempt on the sale of your main residence. 

How PPR worked in the past

Until now, homeowners with more than one residence have been able to choose which property they would like to qualify for PPR. CGT was not payable on the sale of your main residence, only the sale of a second property. So if you had a holiday home, or purchased a second home during the year, you could choose which property you wanted to elect as your “main residence” for the purposes of tax efficiency. 

No election was necessary when you moved house, just when you occupied two homes at the same time. The legislation meant home owners had to do this within 2 years of buying their second property. You could switch your nominated residence between your different properties as often as you wanted and all you had to do was notify HM Revenue & Customs. There was then no tax payable on the sale proceeds made within 3 years on your main residence.

The recent and proposed changes

Firstly the government imposed changes by applying CGT to non-UK residents following concern they were electing their UK property for relief, in spite of not actually living here. Then restrictions were also imposed on the CGT exemption of the final period of ownership, reducing it from 36 months to 18 months for property disposals on or after 6 April 2014. Now the government is proposing changes that either:

• Removes your ability to choose which residence is your main residence, instead determining this based on the facts and evidence available; or
• Replaces your ability to choose with a rule which identifies a person’s main residence, for example, by reference to the property in which you spend more time. 

Guidance has yet to be provided as to how any current elections you might have in place will be treated in the future.

When will the changes be introduced?

It is anticipated that any changes will take effect from 6 April 2015. PPR has been one of the most valuable tax reliefs; the proposed changes will have wide reaching implications in a number of situations. It could for example be particularly difficult for a couple where one of them is struggling to sell their property after moving in together.

If you have a second home then you should seek the help of an advisor for a review of your capital gains tax position to see if a property election needs to be implemented or altered. 

The content of this post is up to date and relevant as at 03/07/2014.

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