Capital Gains Tax - which is your main residence?

Your main residence is exempt from capital gains tax because of private residence relief, which negates any capital gains. When someone owns more than one property however, the tax position becomes more complicated.

The main residence

Unless you confirm with HMRC which is your main residence, they will decide which of your properties is your main residence based on the facts.

However, when you acquire a second residence you can make an election as to which one is your main residence. This does not have to be the one in which you spend the most time; you are free to pick any property as long as you do live in it some of the time.

It is also worth noting you are able to change this decision at a later date, electing for another property to be your main residence.

What implications does this have for tax?

If you have owned two properties for a number of years, it is likely that they will both have increased in value but not necessarily by the same proportion, based on location and desirability of particular areas and all sorts of other factors. This increase in value does have a bearing on how much Capital Gains Tax is applicable.

Which is my main residence?

For example, say you own a holiday home in Devon which you purchased in 2002 for £85,000 and it is now worth £220,000. The other property in Ringwood, was the main family home and cost £275,000 in 1999 when it was purchased.

Since retiring you spend more and more time in Devon, in the holiday home, and less time in Ringwood, but have not sold the property which is now worth £600,000.

Lee Young is a Solicitor and also a Chartered Tax Advisor and he heads up our Wills & Tax Team. He explains the consequences if you were to look at selling both properties.

He says “If you sold both homes, and ignoring the benefit of private residence relief, the capital gains bill on the Ringwood property could be in the region of £87,800, or on the Devon property in the region of £34,600. The actual liability will be up to HMRC based on its determination of which property qualifies as your main residence, and for what period.”

Advance planning

The above example shows there is potentially a large saving to be made by being able to determine your main property.

Furthermore, a property that has been your main residence for some time during your ownership qualifies it for at least the last 18 months of relief, as well as potentially other periods.

Therefore being able to legitimately establish both properties as your main residence at some point can have a significant reduction on the tax bill.

Private residence relief

Lee explains “You are able to benefit from private residence relief on your main property which negates a substantial amount of the capital gains tax. Timing is key and advice from experienced specialised solicitors and tax planners is of great value. Usually, you must elect a property as your main residence within a two year period from the time that you buy the second property or acquire some sort of legal interest in it. If you do own more than one property it is unwise to leave it to HMRC to elect which is the main residence.”

Our Wills & Tax Team are happy to discuss any issues that this raises for you. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and Lee or a member of the team will be happy to chat about your situation and your particular requirements.