Capital Gains Tax on Second Homes
The rules regarding the capital gains tax treatment for a second property are quite complicated and commonly misunderstood. As soon as a second property is bought or becomes available example by the finishing of a letting period a principal private residence collection should be filed with HMRC. In practice there is two years in which to file the selection but here at Tuchbands we like to deal with things promptly so that this deadline does not get mixed or overlooked.
The whole purpose of the election is that the tax payer decides which is their main residence. Without the election HMRC will decide based upon the facts available to them. So it is much better to be in control of the situation by filing the election.
If you own the second property you still need to use it. It has to have been occupied by the claimant at some point in time. Typically this may be for a period of months which could be in the case of a separate home used monthly at weekends etc. There are several cases where HMRC has challenged the quality of the second home occupation, even though an election has been filed.
If the property is let, then if it had been a main residence at some point in time last three years of ownership are exempt from CGT and there is an additional lettings relief £40,000. If the property is jointly owned between husband-and-wife then there are two lots of exemptions and two lots of £40,000 letting relief.
In practice, by getting the elections right you can save a lot of CGT.
Written by Philip Woolfson
Philip is a Senior Partner of Tuchbands, a dynamic firm of North London accountants based in Golders Green. Philip has handled accounts and taxation for a wide range of industries, from property investment through to the fashion industry and in his 35 years has helped hundreds of businesses to thrive in both rising and falling markets.
You should claim the pro-rated anmuot you paid on the old property and any pro-rated anmuot you paid on the new property (often in advance of the year-end billing), then remember to make any necessary adjustments after official tax bills come out and get re-divided. In theory, you paid the taxes by giving the money to somebody else (or putting it into escrow for taxes) and you are allowed to assume they actually made the necessary payments to the necessary authorities. A lender holding tax escrow should give you an annual statement of taxes collected, held and paid out.