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Determine your main residence

Jonathan Green

Most people know that you do not pay Capital Gains Tax when you sell your main residence because you automatically qualify for a tax relief called Private Residence Relief.  However, ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country to escape to at weekends. You may well have to pay Capital Gains Tax when you sell a property that’s not your main private residence.

A married couple or civil partners may only have one capital gains tax free residence between them, although other couples who are not in a formal relationship can in some circumstances claim exemption on two properties.  For example, two single people in a relationship, each owning a home that is used by the couple as a residence, will still not be liable for tax when they sell. As is often the case, the trick is in the timing. Sell one of the properties before you tie the knot and there will usually be no tax to pay. But wait until after the nuptials and you could find yourself with a rather large tax bill. 

If you have more than one private residence, your main residence will normally depend on a combination of factors including which one you spend more time in, proximity to work and children’s school and which address is used for bills, doctor’s registration, car registration etc. However, it is also possible to determine that matter by formally electing one of them as your main residence. To be valid the election must be submitted to HMRC and approved by them. This requires careful planning, since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable. 

The format and time limits for making an election are very strict. Ordinarily this election must be made within 2 years of acquiring the second property (or a change in residences) however there are exemptions to this in certain circumstances. These elections may also have impacts on your all round tax position therefore it is crucial you seek proper tax advice and have a full review of your tax position.

The principle point to remember is, if you own / occupy two or more properties, make an election to HMRC. Nobody knows what the future holds, in terms of where you will be living, what a property will be worth or when you will sell, however by making an election you give yourself options and flexibility. Remember the election can be changed at a later date. If you don’t make an election you are stuck with the HMRC’s view as to which is your main residence, and this could be very costly as capital gains on residential properties are taxed at the higher rates of 18% and 28%..