The government proposes abolishing the right to nominate which of two properties is your main residence. James Bailey looks at the implications.
A gain on the sale of your ‘main residence’ is generally exempt from capital gains tax (CGT). If you have two properties that you use as residences, you are allowed to nominate which property shall benefit from the exemption, provided you do this within two years of acquiring the second property.
Once a nomination has been made, it can be varied. Together with the rule that deemed a property to be your main residence for the last three years of ownership if it had been your main residence at any time, this has led to some profitable tax planning involving changing the nomination of your main residence from one property to another so as to benefit from the exemption on the final three years of ownership on more than one property.
During the parliamentary expenses scandal a few years ago, this practice became known as ‘flipping’ a property, and was carried out enthusiastically by our MPs! As might have been expected, this has led to changes in the law to counteract exploitation of the main residence exemption.
Recent developments
Already, with effect from April this year, the three year exempt period has been shortened to 18 months (see my article in the March 2014 issue of Property Tax Insider), and in late March 2014 HMRC published a consultation document which includes a further attack on ‘flipping’ due to take effect from next April.
The document is mainly concerned with the taxation of those not resident in the UK, who then sell a residential property in the UK. At present, no UK CGT is charged on such gains (except in the case of those whose non-residence is only temporary). The consultation document proposes abolishing this exemption from April 2015.
If you were a non-resident who owned a UK property, one way to escape the new tax would of course be to nominate your UK property as your main residence (assuming you did in fact use it as a residence from time to time). This would be ‘unfair’ according to the consultation document.
In the interests of ‘fairness’ (which in the world of tax, means increasing the amount of tax to be collected!) the consultation document suggests that the right to nominate which property is your main residence will be scrapped, and replaced by one of two ways of determining which property is your main residence – and this will apply to UK residents as well.
1. A question of fact
The ability to nominate your main residence was introduced because of disagreements with HMRC on which of two or more properties was the main residence. One solution proposed is to return to this unsatisfactory system, which involves trying to determine the main residence based on a more or less random assortment of factors – where do the children go to school, which property is on the electoral roll, where do you spend most time, and so on.
2. A statutory test
Presumably, this will be reduced to a matter of arithmetic – how many nights did each family member spend in which property? It is easy to imagine circumstances where such a test could produce absurd results. It will also presumably mean keeping a record of where you spend each night!
Any suggestions?
The consultation document invites views on these tests, and even suggests the possibility of retaining the right to nominate ‘in some circumstances’, though it does not say what these might be.
Practical Tip:
If you are in the process of ‘flipping’ a property, this may be your last ‘flip’ – and in the future you may need to keep a house log book recording how many nights you spend there!
