Sarah Bradford provides some insights into main residence elections and their consequences.
The capital gains tax (CGT) ‘only or main residence’ exemption is well known, even if the finer details of the legislation are less well understood. However, as a general rule, problems do not normally arise on sale if you have one property which you live in as your home throughout the period for which you own it.
The position becomes more complicated if you introduce one or more additional properties into the mix. A person can only have one main residence for tax purposes at any one time and a married couple or civil partners can only have one main residence between them. To be in the running as the main residence, a property must be lived in as a home. This means that a property which is let out cannot be a main residence while it is let. As long as this condition is met, any property which is lived in as a home for at least some of the time can be the main residence for CGT purposes.
It is not necessary for the main residence to be the home in which the individual or couple spend the majority of their time. As was illustrated by the infamous MP ‘flipping’ scandal, it is perfectly acceptable to choose whichever property achieves the best possible tax result as the main home and to swap them about to ensure the relief is maximised.
Nominating a property as a main residence
The right to choose is, however, time-limited and the taxpayer has a period of two years from the date on which a change in a combination of residences occurred to nominate which of two or more residences is to be treated as the main residence. Each time a change occurs in a mix of residences the clock is restarted and the taxpayer has a further two years in which to make a nomination.
Example – Nominations and variations
Bella has a cottage which is her only property and main residence until 1 February 2011. On that date, she completes on the sale of a city flat, in which she lives from Monday to Friday, returning to the cottage at the weekend. She has until 1 February 2013 to nominate which property is her main residence.
On 22 September 2012, she completes on the sale of a new house. She splits her time between the three properties. The clock starts again on that date and she has until 22 September 2014 to nominate which of her three properties is her main residence. She ceases to use the cottage as a residence on 1 January 2013, letting it out from that date. The clock starts once again and she has until 1 January 2015 to nominate which of her remaining two residences is her main residence.
A nomination runs from the date on which the change in circumstances giving rise to the need to make a nomination occurred and will run until the earlier of the date on which an the combination of residences changes or the date from which the notice is varied. A notice of variation takes effect from the date specified in the notice, which may be up to two years before the giving of the notice. The nomination must be made in writing.
The position on marriage or registration of civil partners depends on the position at the date of marriage or registration of a civil partnership. Where each owns a residence separately prior to the marriage or civil partnership, they have two years in which to nominate the residence that is their joint main residence. A new nomination period also runs from the date of marriage or civil partnership if they both own more than one residence jointly prior to the marriage (even if they had both previously nominated the same residence as their main residence). However, there is no new nomination period on marriage or registration of a civil partnership if one spouse or partner owns two or more residences prior to marriage and the other spouse or partner owns no property, because there is no change in the combination of residences and no jointly-owned residence.
No valid election
Many people are not aware of the need to make an election until one property is sold up and the issue of whether private residence relief is due raises its head. Further, although often it is desirable for the individual to make a nomination as to which property is to be treated as the main residence, it is not mandatory and there may in reality be little need to do so.
In the absence of a valid nomination, the default position is that the property which is treated as the main residence for private residence relief purposes is the one, which as a matter of fact, is the main residence. Although this may be the property in which the individual spends the majority of his time, this is not necessarily the case. In deciding which property is the main residence, HMRC consider the following questions:
- If the individual is married or in in civil partnership, where does the family spend its time?
- If the individual has children, where do they go to school?
- At which residence is the individual registered to vote?
- Where is the individual’s place of work?
- How is the residence furnished?
- Which residence is used as the correspondence address by banks and building societies, credit card companies and by HMRC?
- Where is the individual registered with a doctor and dentist?
- At which address is an individual’s car registered and insured?
- Which is the main residence for council tax purposes?
The answers to these questions do not provide conclusive proof as to which property is a main residence, but they help build a picture as to, as a point of fact, which of the properties is lived in as the main home.
For example, a person may own a family home in, say, Somerset, but work in London and own a flat in London in which they live during the week. If the Somerset property is the hub of family life, that is likely to be regarded as the main residence in the absence of a valid nomination, notwithstanding the fact that the individual spends more time in the London flat.
Final period exemption
Under the final period exemption, the final period of ownership of a property which has been an only or main residence at some point is covered by private residence relief. It does not matter whether the property is actually the nominated main residence at that point. Currently, the exemption applies to the last 36 months of ownership. However, it was announced in the Chancellor’s autumn statement that this is to be reduced to 18 months from 6 April 2014.
From a planning perspective, it may be necessary to vary a nomination for a main residence in light of the pending sale of one property, to make best possible use of the exemption.
Example – House for sale
Hannah has a flat and a house, both of which have been a main residence. The house is currently the main residence, but it is on the market. It will benefit from the final period exemption (36 months prior to 6 April 2014, 18 months thereafter). It therefore makes sense to vary the nomination so that the flat is the main residence and to backdate this by up to two years to ensure that for as much as possible of the final exemption period both properties benefit from private residence relief.
Practical Tip:
Where two or more residences are owned, review the main residence nomination, especially in light of the reduction in the final period exemption from April 2014, to ensure best possible use is made of the relief, and vary the nominated main residence if appropriate to do so
