A client owns two residential properties, one which he lives in and the other used as a holiday home at weekends. Would this client be better nominating a different property as his main residence?
An individual may only obtain capital gains tax relief on one main residence at any one given time. If an individual owns two (or more) main residences complications can arise. Tax legislation provides that an individual may notify HMRC within two years after acquiring a second home which of the two properties is to be considered the main home and so exempt from capital gains tax on its sale.
The word residence is not defined in the legislation, so it must be given its ordinary meaning. For an individual, its ordinary meaning is the dwelling in which that person habitually lives i.e.: his or her home.
Except in cases where the legislation deems a dwelling house to be the residence of an individual, a dwelling house must have been physically occupied in order to qualify for relief. An intention to occupy is not enough.
It is clear that there will be an actual occupation of both properties, the main home, and the holiday retreat. If an individual has two or more residences, he or she has a right, to nominate which is to be treated as the main residence for any period and so will attract relief for the period.
The nomination must be made within two years from the date on which the individual has a particular combination of residences. Each time there is a change in the individual’s combination of residences a new period begins and there is a new opportunity to make a nomination.
A nomination can be varied by a further nomination at any time. The further nomination can be backdated to be effective from up to two years from the date that it was given.
Where an election has not been made and is no longer possible, care should be taken to support an intended claim that a particular property is to be the actual main residence. Documentary evidence such as correspondence address, where council tax is paid, electoral register etc are all typical factors that are considered.
HMRC’s view, which is taken from case law is that the election must be made within two years of the taxpayer having an interest in two or more residences.
By concession, the two-year time limit may be waived in certain circumstance. The concession can be unclear, and it can be difficult in certain circumstances to demonstrate that the taxpayer was unaware of the need to make the election.
If the time limit for an election has been missed and the above concession cannot apply, then it may be possible to mitigate the problem. It must be remembered that there is an opportunity to elect every time there is a change in the number of residences in which the individual has an interest. Therefore, the individual could buy a third property or could let out one of the existing owned properties on a short tenancy and then make a nomination when the tenancy ends.
For further advice on Capital Gains Tax on property contact us