2nd Property – Tax Free?In recent years it has become increasingly common for people to have an interest in more than one residential property, be it a holiday home, a “buy-to-let” property, or a house or flat for the children. Of course, in the current market the potential gains to be made on property are very tempting, but one must bear in mind the fact that the taxman will be waiting to take his share of the proceeds. So what can be done to ensure that you retain as much as possible for yourself? What follows is a brief outline of some of the tax reliefs available in respect of residential property which should serve to reduce your Capital Gains Tax bill.
Most people know from experience that Capital Gains Tax (CGT) is usually not payable on any gain made on the sale of one’s home. However, it is not such common knowledge that more than one property can qualify for this tax relief at once. This is possible thanks to “Principal Private Residence” (PPR) relief, which exempts from CGT any gain made that relates to the PPR period.
Whether or not a property qualifies as the PPR is generally determined by the facts, i.e. “Is the property in fact being treated as your main residence?” However, anyone owning more than one property can submit an election to the Inland Revenue confirming which property is the PPR, so long as there is evidence of an actual period of residence. This must be done within 2 years of acquiring the second (or subsequent) property. Once made, the election can be varied at any time, thus enabling the owner of two or more properties to transfer the PPR status between properties to keep the CGT liability to a minimum.
Further benefits of PPR status are seen in the additional reliefs that are available. When a property has been a PPR for at least part of the period of ownership, the last 3 years of ownership are always treated as PPR years, even if the owner is living elsewhere at that time.
What’s more, a period of absence of up to 3 years from one’s PPR for any reason can also qualify for PPR relief, as can a period of up to 4 years for absence due to your employer requiring you to live elsewhere in the UK. Should your employer require you to live overseas, there is no restriction to the length of the period. These reliefs are subject to the property being the PPR both before and after the period of absence.
Finally, “lettings relief” is available on a property that has been let. This gives tax relief on as much as £40,000 of the gain made, provided it has been the PPR of the owner at some stage.
In addition to the above, indexation allowance, taper relief, losses and the annual CGT exemption can all be applied to any gain made to further reduce the amount chargeable to tax.
Therefore, with careful planning and a sound understanding of all the CGT tax reliefs available, gains on residential properties can be substantially reduced or even avoided. But plan early!
If you have any queries with regard to this article please do not hesitate to contact Steve Cook, Tax Partner at Nunn Hayward on 01753 888211 or
steve@nunn-hayward.com.
