Home in on a valuable tax break: clarity from the taxman for second home owners

A version of this article appeared in the Daily Telegraph on 4 April 2009

Richard Mannion of Smith & Williamson explains how people with a second or holiday home can claim a valuable tax break which could save them thousands of pounds on sale

Faced with falling house prices, the threat of redundancy and rising household bills, many people with a holiday or second home may consider selling their property to release cash and reduce outgoings. However, owners could face an unnecessarily large capital gains tax (CGT) bill if they haven't taken the necessary measures to ensure the second home qualifies for an element of Principal Private Residence Relief (PPR).

Contrary to general belief, it is not necessary to have lived in the second home as your only or main residence for the entire period of ownership. However, in order to qualify for this valuable tax break, both homes must be used by the owner as his or her residence at some stage and they should both be fully furnished. You have the right to choose which is the main property and so which home is eligible for PPR relief. You don't need to prove that you spend more time in one property than the other.

Q. What is Principal Private Residence Relief (PPR)?

This is the tax relief which allows home owners to sell their main property without incurring tax on any rise in value since it was acquired. While it is only possible to have one main home at any time for the purposes of the PPR exemption, gains attributable to the last three years of owning a property are ignored if the property has been the main residence at any time during ownership. This dispensation potentially allows people with a holiday or second home to reduce the CGT bill they would otherwise have to pay on sale.

It is assumed that a married couple or civil partners live in the same home (and so only have one PPR between them). In contrast, an unmarried couple can each own a property and so effectively get two allocations of PPR relief.

Q. How can I claim this tax relief?

You make a simple election stating that one of the properties is the main one. Once made the nomination can be varied subsequently as often as the owner wishes. HM Revenue and Custom's (HMRC's) tax manual states that it is possible to switch the election from one property to another after just one week and thereby claim the exemption for the last three years of ownership on both properties.

There is no need to value the property when nominating one of the properties as your main home as the taxman apportions the gain for the whole period of ownership over time. So, if your bought a holiday flat in 1999 for £100,000 and sold it in 2009 for £200,000, the taxman would assume that your flat gained £10,000 per year. If you claimed the PPR exemption for the last three years of ownership, you would potentially only be charged CGT on £70,000 (as opposed to being taxed on the full gain of £100,000). Q. When must I make the claim? The election should be made within two years from the date when both residences were first available for the owner's use.

So assuming the second property was let out until, say, September 2007 and it was first used by the owner as a second home at that time, the two year time limit runs out in September 2009.

Q. Which property should I nominate as my main home?

People typically choose the property which they expect to sell first, or else the one which they believe will rise most in value. Q. How do I elect a property as my main home? You just write a letter to the taxman stating which property you wish to nominate for this tax relief. In the case of a married couple both spouses must sign. Be sure to keep a copy. Q. What happens if I don't tell the taxman which is my main home? Failure to nominate one property or the other means it will be necessary to prove which was the "main" residence. This could entail lengthy arguments with HMRC about where the post was delivered, where the owners were registered to vote, etc. Valuable opportunities to claim tax relief may be lost, since the property most likely to produce the larger gain on sale may not be selected.

Q. What else can I do to minimise the tax bill on sale of a second or holiday home?

If you are married (or in a civil partnership) it is usually best to own the property jointly with your partner. This means that you can each claim your annual CGT allowance, which taken together means you can jointly make gains of £19,200 for 2008/09 before paying tax. CGT is now charged at 18%. Q. What are the watchpoints? The fundamental point to remember is that any property on which you claim the PPR allowance should be fully furnished and available for your use - even if you don't live there full-time. The reference to residence suggests a long-term arrangement. You can expect an argument with HMRC if an investment property is used as the owner's home for a short period between lettings while the main home is being decorated. PPR is particularly helpful for those who genuinely have, say, a weekend home as well as a property they live in during the week. Or perhaps where one spouse has a flat close to work while his or her family live elsewhere. In such situations it should be possible for the family to elect for one property to be their main residence for a short period and so lock in the PPR allowance, thereby exempting them from CGT on up to three years' worth of capital gain on that property. However, care must be taken and you should consider getting professional advice.

For further information, contact:
Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group
Tel: 020 7131 4250
E-mail: richard.mannion@smith.williamson.co.uk

www.smith.williamson.co.uk 

PR enquiries:
Kate Harrison, tel: 020 7131 4228

Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Note to editors
Smith & Williamson is an independent professional and financial services group employing over 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, North London, Salisbury, Southampton, and Worcester. Smith & Williamson Limited Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.