As London property prices are generally higher than elsewhere in the country, the exemption can often be put to best use against a London property. Although part of the outrage concerned the fact that MPs can use parliamentary allowances to fund their second home, the ability to choose which residence qualifies as the main residence for PPR purposes is specifically provided for within the tax legislation and available to all taxpayers, not just MPs.
PPR
To prevent people suffering a capital gains tax bill when they move house, relief from tax is available on a gain arising on the disposal of property that is the individual’s only or main residence. Thus, if the property has been the individual’s only or main residence throughout the period of ownership, no capital gains tax is payable if a gain arises when that property is sold, irrespective of the size of the gain.
Full relief is also given if the property has been the taxpayer’s only or main residence throughout the period of ownership. Where the property has been the main residence at some time, the last 36 months of ownership is automatically exempt.
However, a tax charge may arise if the property has not been the only or main residence at any time during the period of ownership other than in the last 36 months. Where this is the case, the exempt gain is the fraction of the gain attributable to the period of ownership during which the property was the only or main residence including the last 36 months, divided by the length of the period of ownership.
Any periods of absence:
not exceeding three years (or periods of absence totally three years); plus
any period of absence during which the individual worked in an employment the duties of which were performed abroad; plus
any periods of absences not exceeding four years in total during which the individual was prevented by his or her job from living in the main residence, needing instead to occupy job-related accommodation,
are disregarded, provided that the absence was both preceded by and followed by a period when the property was the individual’s only or main residence.
Multiple Residence
Where an individual has two or more residences, he or she has the right (under TCGA 1992, s. 222(5)) to nominate which of these residences is to be treated as his or her main residence for any period. The property nominated as the main residence will attract private residence relief for that period. This provides tax planning opportunities where an individual has more than one property. By making the right nominations, it is possible to mitigate any capital gains tax liability, for example by choosing to nominate the property with the greatest potential gain as the main residence. Small gains can be mopped up by the annual exempt amount.
Before a property can be nominated as a main residence, the property must actually be used as a residence. This prevents a person from nominating an investment property which has never been used as residence (such as a property bought as a buy-to-let property) as his or her main residence purely for the purposes of obtaining relief. However, a property which has been a main residence and which is subsequently let will benefit from letting relief on disposal.
It is accepted that a person can have more than one residence. Thus a person who has a house in one part of the country and a flat in London (the MP scenario) is regarded as having two residences. Either one can be nominated as the main residence. The main residence does not have to be property in which the taxpayer spends the most time or indeed the larger of the two properties. Thus where a taxpayer has a family home and city crash pad, if desired, the city crash pad can be nominated as the main residence for the purposes of private residence relief.
If a person only has one residence, that property does not have to be nominated as the main residence as the relief is given automatically. However, where a person has more than one residence, a property must be nominated as the main residence within two years from the date on which a second residence was acquired. The two-year nomination period starts to run again if there is a change in the combination of residences.
Example
Mike has a house in Leicester which he has owned since 2003. On 1 May 2007, he starts a new job in London and buys a one-bedroom flat in which he spends Monday to Thursday each week, returning to his Leicester house each weekend.
Mike has until 30 April 2009 to nominate one of these properties as his main residence.
On 1 June 2008 he buys a property in the Lake District which he uses on a regular basis for walking breaks. He now has until 31 May 2010 to nominate which of the three properties is the main residence.
The time limit for making a nomination can be extended by concession (ESC D21) in certain circumstances if the individual is unaware of the possibility of making a nomination. The nomination must be made within a reasonable time of the individual becoming aware of the need to do so.
Once a nomination has been made, that nomination can be varied. This provides flexibility to use the private residence relief to best effect and a nomination can be varied when a disposal is on the cards, or indeed when one has already taken place. However, a variation cannot take effect for more than two years before the date it was given.
Example
Bella has a house in Devon, which is her main residence. In September 2005 she takes on a new job in London and buys a flat in Chiswick for £400,000. She lives in the flat from Tuesday to Friday each week while working in central London. She nominates her Devon house as her main residence for private residence relief purposes.
In July 2008 she sells the London flat for £500,000, realising a gain of £100,000. She submits a notice of variation in August 2008, nominating the London flat as the main residence for one week in January 2007. As the Chiswick flat has now been the main residence as some point during the period of ownership, the last 36 months of ownership is exempt. By nominating the Chiswick flat as her main residence for a short period, she is able to realise the gain free of capital gains tax.
Husband and Wife and Civil Partners
In the context of private residence relief, married couples and civil partners get something of a raw deal. A husband and wife or civil partners who live together are only allowed to have one main residence between them. It is therefore not possible for them to jointly own two properties and for each partner to have one property as his or her main residence. However, this option is available to unmarried couples.
Where one partner owns more than one property prior to the marriage or civil partnership and the other party does not own a property, a new nomination does not have to be made as a result of the marriage or civil partnership.
However, if both parties jointly own two or more properties prior to the official union, a new nomination must be made within two years even if they had both nominated the same property as the main residence previously. For the nomination to be valid, it must be made jointly within two years of the marriage or civil partnership.
Final Thoughts
In the current climate, where tax planning is often construed as `tax avoidance’ and perceived loopholes closed by complex anti-avoidance legislation, the invitation to minimise the capital gains tax liability arising on the same of multiple residences is one that should be turned down.
Taxpayers with multiple residences should review their portfolio on a regular basis and ensure that the private residence exemption is put to best use, changing the property nominated as the main residence so as to achieve this.
Sarah Bradford
