This article appeared in the Yorkshire Post on Saturday 15th April 2006.

G&E Taxing Times - Second chances for owners

Richard Whitelock Personal Tax Manager

Over the years, there has been an increasing trend in the number of people owning more than one home. The second property may be for work purposes – a pied à terre, where you spend the working week to avoid a lengthy commute. It may be a holiday retreat.

Capital Gains Tax is chargeable on gains made on the sale of most assets, including properties. A common example of property that suffers tax on sale is buy-to-let investment properties. However, there is a specific tax relief for properties that are your home, called the “Principal Private Residence” (PPR) relief, which ensures no tax is payable on sale.

Any property that qualifies as your main residence at some time will attract the PPR relief. The relief shelters certain periods of occupation of the property from tax – both actual occupation and qualifying “deemed” occupation (which include absences due to having to live elsewhere for employment purposes). It also removes the last three years of ownership in calculating any gain, whether you are living there or not.

You can only have one qualifying main residence at any given time, so the tax relief can only apply to one property, which could mean that one home may be fully sheltered from tax whilst the other is fully exposed. So what can be done to save tax if you have two homes?

Under the PPR rules, you are able to nominate which property is to be classed as your main residence for tax purposes. Married couples living together can only have one qualifying main residence between them, so it is not possible for each spouse to nominate different homes.

The nomination is made by sending a formal election to your tax office within two years of purchasing the second home. Once made, the nomination can be changed, and be backdated by up to two years, and can even be done after you have sold one of the two homes, which can lead to some useful tax planning.

If you acquire a second home and do not make a nomination within the two year time limit, your main residence will be decided by the Revenue as a question of fact. This may not be to your advantage if that property has the smallest gain so considering making a nomination is always advisable.

Let us consider an example to illustrate how this ability to change the nomination may be helpful, where an individual owns two homes for many years, one of which has never been classed as his qualifying main residence at any point, and it is that property that is sold:

An individual has owned and occupied two homes for many years, a house in Leeds and a flat in Nottingham. He made an election at the time he purchased the second home in Nottingham that the Leeds property be his qualifying main residence. He sells the Nottingham flat for a large gain in February 2006 and on March 10 2006 he notifies his tax office that the Nottingham flat is to be classed as his main residence with effect from March 10 2004. On March 17 “006 he notifies the Tax office Once again that his Leeds property be of classed as his main residence with effect from March 17 2004.

These elections enable him to obtain PPR relief for the last three years’ ownership on the Nottingham flat, at the small expense of having one chargeable week on the Leeds house. If the gain made on sale was £100,000 and the flat was owned for say 10 years, these elections will have sheltered £30,000 (£100,000 x 3/10) of the gain, with a potential tax saving of £12,000.

Clearly, by careful planning with the PPR election, significant tax savings can be made. Wherever there are two homes, nomination can be made to ensure that both are classed as qualifying main residences at some point in order to shelter the last three years from tax on both properties. Ordinarily, the property that is expected to realise the largest gain on sale will be the property that retains the nomination for the largest duration.

Furthermore, where PPR relief is available there is an additional relief which can be exempt from tax periods when the property was let out (subject to certain limits) and this can lead to more tax saving opportunities. Capital Gains Tax on properties can be a complex area, and the PPR nomination is an essential tool for those with more than one home. It is always recommended that you seek professional advice on such issues to ensure that your properties are held as tax efficiently as possible.

Richard Whitelock is Personal Tax Manager at Garbutt & Elliott. Garbutt & Elliott are Chartered Accountants and tax advisers with offices in Leeds and York.