Investment Property Accountants - WARR & CO

Investment Property Accountants

Property Investor Tax Relief –

Private Residence Relief - A Second Home

Despite the recent downturn, property prices have performed particularly well historically and almost everyone who has owned their house for five years or more will still be sitting on a sizeable gain. It is therefore not uncommon for people to acquire a second home both as an investment and as a week-end holiday home for themselves and their family.

But what happens when a second home is sold? This may be for the purposes of realising an investment, or perhaps to change the location of a second home. Well, most readers will be familiar with the exemption from Capital Gains Tax of a principal private residence. The problem is that a person (or married couple) may only have one principal private residence so any profit on the disposal of a second home will result in a liability to Capital Gains Tax.

Let us consider an example:

Harry has owned his main residence in London for 10 years. Just under three years ago he purchased a small cottage in Scotland for £250,000, which he has used as a holiday home. He now intends to sell this cottage and purchase a similar holiday home in Cornwall. He has accepted an offer of £350,000. Harry will realise a gain of £100,000 and, after deducting his £9,600 annual exemption, will face a liability of £16,272 (18% x £90,400). Is there anything that Harry could have done to avoid this liability? Yes, there is. H M Revenue & Customs (HMRC) will have determined that Harry’s London property remained his main residence because that is where he spent most of his time. However, a person who acquires a second residence is entitled to elect which of the two is his main residence, and HMRC are then bound by that election. Crucially, to be valid, an election must be made within two years of acquiring a second residence.

So Harry could have elected (within two years of acquiring it) for his cottage in Scotland to be his main residence. Had he done this, the gain he realised would have been exempt and no tax would have been payable. The downside of this strategy is that on the eventual disposal of his London home, three years of the gain would be taxable, which may be far from ideal.

There is, however, a far better strategy that Harry could have adopted. This results from the fact that once an election has been made it can be varied. What Harry should have done when he acquired his cottage was to elect for his London home to be his principal residence. Then, shortly before selling his cottage he should have varied the election in favour of the cottage for as little as a month.

At first sight this strategy achieves no tangible benefit as for 35 of the 36 months of ownership the cottage fails to attract principal private residence relief. However, another relief comes to the rescue here. If a person sells a house which at any time has been his principal private residence, the last three years of ownership are ignored for Capital Gains Tax purposes. So no tax would have been payable and the only detriment Harry would face would be that on the eventual sale of his London home one month of the gain would be taxable. Of course, in practice this gain would probably be small enough to be covered by his annual exemption.

The clear message is that if you do ever buy a second home you should seek advice at that time. Please feel free to contact us.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Date of Article: 21st October 2008


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This domain is owned by Warr & Co Chartered Accountants which is a member of the Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact Peter Edwards on 0161 477 6789 or email us at info@warr.co.uk

 

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