By now, most people are aware of the possibility of “flipping” your main residence and thus securing at least some of the exemption for a main residence on more than one property.
Broadly, if you have two residences, you (or you and your spouse together, if you are married) can nominate which is to benefit from the exemption from CGT on your “main residence”, and you can then change this nomination at a later stage. The time limit for the first nomination is two years from when it becomes necessary to determine which is your main residence - so, generally, from when you acquire the second property or when it first becomes available to you, perhaps having previously been let.
By nominating one property for a short period – say, a month, you secure exemption on your last three years of ownership of it (because that’s how the rules work!), at the cost of only losing a month’s worth of exemption on your “real” main residence.
The point that tends to be forgotten is that for all this to work, both properties must be your “residence”. The example I often use is of someone with a family home in Cornwall, and a flat in London where the individual stays during the working week. Clearly, both properties are used by him as “residences” and so he is in a position to make a nomination, “flipping” the London flat to secure exemption for the last three years of ownership – complete exemption, of course, if he sells it within three years.
HMRC seem to have finally woken up to the fact that this procedure is being abused, by nominating properties that are not really “residences”, and the recent case of Mr and Mrs Harte (Harte v Revenue & Customs [2012] UKFTT 258 (TC)) is an example of a successful challenge to a nomination.
The Hartes had lived at a property called Crofts Road for a number of years. Mr Harte also owned another property, Alder Grove, which he had inherited from his father in 1992. It had been occupied by his step mother until her death in May 2007. In June 2007, Mr Harte transferred ownership so he and his wife owned Alder Grove jointly.
A neighbour of the step mother offered to buy Alder Grove. The sale was agreed in principle in August 2007, and completed in October 2007.
During the period from May to October 2007, the Hartes spent time at both Crofts Road and Alder Grove. Alder Grove still had the step mother’s furniture in it so they were able to stay the night without moving any of their own furniture in.
They made an election to nominate Alder Grove as their main residence from 11 October to 19 October.
HMRC rejected the nomination and the Tax Tribunal agreed with them, on the basis that Alder Grove had never been their “residence” so no nomination would be valid.
In particular, the Tribunal noted that the two properties were very similar (three bedroom suburban villas) and only six miles apart, and that no personal items such as pictures or ornaments were moved to Alder Grove, and no friends were entertained there.
The Tribunal said that for a property to be a residence there must be “some expectation of continuity” of occupation. Given that the longest continuous period they spent at Alder Road was three weeks, and they made no attempt to move in or make the place their own – and were negotiating to sell it all the while, the Tribunal said it had never been their residence and the nomination was invalid.
Practical Tip :
The Harte case is a salutary lesson for those who think it is just a matter of sending a letter to the tax inspector to secure the exemption on a “flipped” property. Unless there is real substance to the claim, a nomination will be rejected if your occupation of the second property is (I’m sorry, I can’t help myself) half-hearted!
James Bailey
