You don’t need to live in a residence for long, but you do have to live there!

A recent case involved a couple who inherited a second home from a deceased parent.

Anyone owning two residences can make an election as to which one is to be treated as their main residence for CGT purposes. Once an election has been made within the required time limit, it can be varied at any time. This means that a ‘second home’ can be classed as the main residence for a short period shortly before it is sold. The benefit is that the last three years of ownership are then classed as qualifying for exemption from CGT.

The couple complied with the usual filing deadlines and sent an election to have the second property considered as their principal private residence for the week before it was sold on 19 October 2007. If successful, the election would have had significant Capital Gains Tax consequences. For example if a property is at any time considered to be a principal private residence, the last three years of ownership will be ignored for CGT purposes.

HMRC rejected their claim.

The election was refused, not because they only claimed to be in residence for a week, but because they could not demonstrate that they had occupied the second property with any degree of permanence or continuity.

For example:

  • The owners kept no records of their periods of residence in the inherited house.
  • None of the householder bills were in their personal names.
  • No personal possessions were moved to the second property.
  • The inherited house was similar to, and only 6 miles from, the main residence.
  • Steps were taken to sell the property shortly after it was inherited.

This case is a salutory lesson for those considering this type of arrangement: it is not only essential to make a proper election to HMRC within the required time limits, it is also critical to accumulate evidence of appropriate occupation of the elected property.