TT187: Taxman Targets Second Homes

August 07, 2013

Taxman Targets Second Homes

Recent reports in the media highlight what HMRC have described as a ‘crack down’ on possible capital gains tax (“CGT”) evasion on the sale of second homes. Apparently HMRC have been trawling through a decade of property transactions and have so far sent letters to 35,000 taxpayers who could owe tax.

In the circumstances it is useful to remind ourselves of the rules regarding CGT as it applies to residential properties.

CGT is not applied on the sale of a main residence because of a relief known as Principal Private Residence (“PPR”) relief but this relief does not apply to a second home and many people do not realise that tax may be payable when a second home is sold, even if that second home is abroad. Since there are estimated to be 1.6m people with a second home in the UK and another 820,000 with a second home abroad, it is understandable that HMRC are becoming increasingly active in this area.

CGT is charged at 18% for basic rate taxpayers and 28% for those in the higher and top-rate tax bands. Even with the personal CGT tax free allowance of £10,900 it would be easy for a second home owed for a number of years to result in a sizeable gain and a large tax bill, particularly as , following the abolition of indexation allowance, inflation related gains are now taxed.

There are, however, reliefs available which should be taken advantage of. The most important of which is PPR relief referred to earlier.

When an individual has more than one property available to him as a home it is possible to elect which one should be considered as the PPR. This is an important election due to the tax rules surrounding PPR relief. Once a property has been elected as the PPR, then the last three years of ownership of that property are deemed to be covered by PPR relief. For example, if a new property is purchased as a second home, an election could be made that the new property is the PPR. One month later an election can be made to reverse this so that the original residence becomes the PPR again. If the second home was owned for (say) six years then any gain accruing during the one month it was the PPR plus any gain accruing during the last three years of ownership would be exempt from CGT. Meantime, the original residence would lose only one month of PPR exemption on any gain over the period of ownership.

Married couples and those in a civil partnership can only have one PPR at any one time but there is no reason why an unmarried couple cannot have two. It would be best in such circumstances that HMRC were informed which property each individual considered their PPR.

It should also be remembered that individuals each have an annual CGT exemption of £10,900 and so planning can be done to divide any gain to take advantage of this (although such planning is far more straightforward where couples are married or civil partners).

Further complications can arise when a second property is considered a second home for some period of ownership and is rented out for other periods. Here some gain may be exempt under PPR relief for the period the property was a second home and a further relief may be due, known as ‘Letting Relief’ the rules of which are somewhat complicated but which generally mean that a gain accruing to the period during which the property was rented will be exempt if that gain is less than £40,000. The same complications can also arise if you rent out part of your home while you live there and the same relief also applies.

Yet more complications can affect PPR relief if a property has particularly large grounds, is used partly for business purposes or if there are periods of absence (perhaps if you are working abroad for a period).

It is clear that the taxman is taking a closer look at second homes and that failure to plan properly can lead to some unwelcome tax consequences. If you think the above issues may affect you, please call you Barnes Roffe LLP contact partner to discuss your concerns.


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