TT138: Second Home Capital Gains Tax

June 22, 2009

The recent uproar over MPs’ second homes has brought the current capital gains tax (CGT) rules onto the front pages. Commentators have speculated that the misuse of House of Commons expenses to pay for second homes will rebound in such a way that the current rules for CGT on second homes could be subject to change.

Current Rules:

  • You are allowed to have one main residence that is not subject to CGT (a married couple can only have one residence between them).
  • When you sell your residence it might take a number of months, however, you might be forced to buy a new property and move on. Therefore the rules give you a period of time to sell your old property before it ceases to qualify and becomes subject to CGT.
  • Since the 1980s the period of time you could continue to hold your old property has been 36 months. This was to assist through a former housing crisis when people could not sell property easily.

Example of Use:

It can be seen above that the use of the property in the last 36 months of ownership is therefore not relevant for CGT purposes. You could have rented it out and it would still be CGT-free on the eventual sale. Indeed, if you rent the property out as residential accommodation then there is an additional CGT-free allowance you can claim if the property was once your residence. Using this rule you can have substantial periods of letting of a former residence without paying any CGT!

As an example, say you lived in one home and it was your main residence (i.e. you only had the one property). If you then bought a second home and started to use it as a residence (e.g. a weekend holiday home) then you now have a choice as to which home is your main residence. Broadly speaking you have two years from acquiring the second home to make or vary an election to nominate your main residence. If you did nothing then you risk the main residence being determined by fact later on. This might not suit your tax computation!

Using the above example, say you made the election to state the weekend retreat was your main residence. This election could then be varied after a few months to bring the main residence status back to your first house

When you come to sell the first house only a very small proportion of the gain (being a few months divided by your total length of ownership) will be subject to CGT. This would most likely be covered by your annual CGT free allowance. Alternatively, if the period of the election is in the last 36 months of ownership then it is tax-free under the above rules in any event.

However, when you sell the holiday home, the period which is tax-free is the short period for which you elected it as your main residence, plus (if not overlapping) the last 36 months of ownership. Hence, you could sell this after three and a bit years of ownership and pay no CGT without damaging your CGT free status of your first house.

Barnes Roffe Topical Tips

  • The rules are complex, but there are useful aspects you can use to minimise your CGT.
  • If you have a second home then take action now – even if you have not yet made an election all may not be lost!
  • The tax-saving potential is large!
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