Sale of a second home and making a PPR election to reduce CGT

My question relates to CGT liability on a the sale of a second home. I am married, and acquired both homes after the marriage, but both homes are owned by me solely.

My first house (property A) was bought in 2001 for £175,000. It is has always been our main residence and we don't plan to sell it. The current value of this is around £400,000.

I bought a flat (flat B) in June 2007 for £220,000 for occasional use.

I am currently selling this flat and expect to get £300,000.

I will then use the proceeds from the sale of flat B to buy a new flat (flat C) for £500,000.

I am being seconded overseas to Belgium for 2 years and will let out our main residence but will stay in flat C on my return.

My question relates to my current and future capital gains tax liabilities.

Is there a way of minimising my tax liability on the capital gain expected on the sale of flat B?

Is there a way of minimising my future tax liability on the sale of flat C? (eg by declaring it as my main residence whilst I'm working in Belgium?).

Answer:

In your case, you occupied property A throughout your entire period of ownership as your main residence, therefore this would be exempt from CGT.

The key issue here is the use of a principal private residence ('PPR') election to reduce the gains arising on property's B and C.

The PPR election applies for the purposes of deciding which of two residence is to be an individuals (or married couples) main residence and therefore attract PPR relief. This applies irrespective of which of the residences is actually occupied as the main residences.

The main issue is whether as from June 2007 to date you have had two residences (ie A and B). You would need to look at your occupation of property B, however, provided you have had regular visits there the Revenue would be likely to accept that you had two residences.

They have specifically stated that where you occupied one property monday - friday, and travel to another property for weekends, they will usually accept that this will constitute two residences. Provided you satisfied the condition of wo residences you would be entitled to elect which property was your main residence.

There is no particular format for the election, although a letter stating the addresses of the two residences, dates of purchase, your tax references and the property to be treated as the PPR would be sufficient. You should also state the date that the property would be treated as the PPR from.

There is a time limit of 2 years from the date that you both had a combination of residences. In your case, this would be taken to be the date that property B was purchased - therefore you would have until June 2009 to make the election.

By electing property B for a nominal period eg 1 week/month you would be entitled to full PPR relief on property B and would lose only a nominal amount of relief on property A.

You can vary the election as many times as you wish, therefore you could certainly elect C to be your main residence again if you wished, providing you occupied both properties as residences.

Note that for this to apply, both properties would need to be residences, and as such the Revenue may, seek proof that the properties were occupied by you for the periods stated. Therefore any evidence you could provide, eg council tax position, employer letters, train fares etc etc would be useful.

Note that the time spent overseas should in any case be deemed occupation for the purposes of CGT relief, particularly if no overseas property is purchased.

When an individual goes overseas under a contract of employment the period of absence from the UK main residence would be deemed occupation providing both before and after the period of absence the UK property was a main residence (and there was no property overseas qualifying for PPR relief).

Therefore it would make sense to elect for property B/C to be the main residence whilst overseas, and provided A was occupied as a main residence (and was reelected as such on your return) full PPR relief could potentially be claimed provided the Revenue accepted this.

You could also consider a transfer of an interest in the property to your wife to utilise two annual CGT exemptions (currently worth around £19,200), although it would be beneficial to identify whether PPR relief would in any case fully exempt the gain arising.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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