As part of the 'expenses scandal', it has come to light that some MP's have been deciding which of their homes is treated as their principal residence, in order to save capital gains tax (CGT).
The rules on gains made on property are fairly clear. As far as your main home is concerned, there is no CGT to pay, provided: it was primarily for use as your home rather than with a view to making a profit; that it was your only home throughout the period you owned it (ignoring the last three years of ownership): and you did actually use it as your home. There are other rules which your financial or mortgage adviser can outline for you.
Importantly, if you are married or in a civil partnership and not separated you and your spouse or civil partner can have only one such residence between you (which may surprise some MPs). As far as second residences are concerned, you will normally be expected to pay CGT on any gain you make, after certain allowances.
Can you flip too?
The question is, of course, if MP's can decide which residence is their 'principal' one, can you do so too? The surprising answer is - at least until the government moves to close this gap - that you can. If you own and occupy more than one residence, you can choose which one is to be your primary residence for CGT purposes (subject to some restrictions).
This is particularly helpful for those who buy a holiday home with the intention of retiring to it later on. If they move to the retirement home a year or so before selling their main family home, they can still opt to have the old home treated as their principal residence, so that it is exempt from CGT. More importantly, if they decide, while still living in the main family home, that the 'holiday/retirement' home is in the wrong place, they can usually designate the 'holiday/retirement' home as their principal residence, sell it, buy another one elsewhere and then re-designate their family home as their principal residence. In this way, just as for MPs, there will be no CGT payable.
Let property
Where a second property has been let, in order to generate an income, it may be possible to obtain letting relief, which can reduce the chargeable gain by as much as £40,000 per owner. For most landlords, £40,000 represents a considerable gain that can easily be put towards additional needs such as landlords insurance.
How much will CGT be?
As indicated above, a couple can only have one principal residence at a time, but each has a personal allowance against CGT. For the current tax year, this is £10,100 per individual. So imagine that a married couple were to sell a property that did not qualify for relief as their principal residence, for £500,000 that they had bought some time earlier for £350,000. This would make a gain of £150,000. Each would be entitled to an exemption of £10,100 so, assuming equal ownership, the taxable gain would be £129,800. With the rate of CGT at 18%, this would create a tax charge, between them of £23,364 (provided no other chargeable gains had been made during the year).
If the property had been purchased with a view to passing it down the generations, making the children joint owners from outset would mean that they, too, could use their annual exemption to reduce the liability.
You should take individual professional advice before making any decision relating to your personal finances and should be aware that there may be variations for those living in Scotland and Northern Ireland. Also remember that your home may be repossessed if you do not keep up repayments on your mortgage, so you should think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser.
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