LONDON, ENGLAND - MAY 23:  A 'Government of th...

We have all seen and heard comments in  the  media  about  MPs “flipping” their properties in order to avoid capital gains tax on selling their  second  homes.

You might be wondering what does this mean? And is this a game  anyone  with  more  than  one “residence”  can  play? …read on

The hysteria has surrounded the facts that

  • MP’s have been able to purchase a second property with a mortgage of up to £300,000 funded by the taxpayer, then ‘flip’ to avoid or minimise the capital gains tax payable.
  • Some MP’s have nominated one property as their second home for House of Commons expenses purposes, and a different home as the second home for CGT purposes.

Lets start with some basic rules

  • You are exempt from CGT on a gain from selling your  “main  residence”,  and you  can  only  have  one  main  residence  at  the same time.

  • If you are married or in a civil partnership, you can only have one main residencebetween the two of you.

  • The one  exception  to  this  rule  is when a property has been your main residence at any time during your ownership of it, in which case exemption extends to the last 36 months before you sell it, even if in fact you have another main residence during that period.

The purpose of this exception is to make some allowance for the fact that you may need to buy a new home before you manage to sell the old one. Certainly a consideration in todays marketplace.

When you have more than one “residence”, the law allows you to nominate which one is to be treated as your “main residence” for tax purposes and so enjoy the exemption from CGT. You must do this within two years of having a choice, ie more than one residence.

Once you have made this nomination, by writing to the tax office that deals with your tax affairs, you can subsequently vary that nomination at any time in the future, and the variation can be backdated by up to two years. In the case of a married couple or civil partnership, both must sign the nomination and any subsequent variation.

For example:

Ian buys a holiday home in North Wales in December 2006. In January 2007  he writes to his tax office to make an election that his home in Stockport should be his ‘main residence’. In July 2009 he decides to sell the holiday home.

He writes to the tax office in July 2009 ‘varying’ the election making the North Wales property his main residence. Two months later, he writes again making the property in Stockport again the main residence. Because   the   North Wales property was   properly   nominated   as   his  “main residence” for a period (July and August 2009), the last 36 months of the gain are exempt from CGT.

The house in Stockport has a period of two months when it was not the ‘main residence’ and the eventual gain on the sale of this property will need to be time apportioned and the two month period will not be exempt. However, the chances are that the gain for such a short period would be covered by the annual exemption from capital gains tax, which most people rarely use.

It is important to make the election in the first instance, when two homes are available. If the election is not made, then there is no opportunity to vary it. If you have failed to make the election within the time limit, please do speak to us about the situation,  we can advise on the options available.

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