When you sell most assets, Capital Gains Tax (CGT) is due. This is a tax on the increase in value of the asset during the time you’ve owned it. So how come you don’t often hear people talking about CGT when they sell their home? It’s because of one of the most famous tax exemptions – Principal Private Residence or PPR.
For most people PPR means that selling your main residence will not result in any tax bill. No tax bill, no tax forms – happy days. But the exemption isn’t always applicable. Multiple home ownership starts to complicate the picture.
If one home is your main residence and the other is not, then CGT will be due when you sell the non-main residence. However, there are some complex rules that can save you tax within this common situation.
When you buy a second home that you use as a residence you can make an election on which property is your main residence. Even better is the fact that you can simply make the choice. The property doesn’t actually have to be your main residence. This election must be made within two years. If you don’t make the election then the facts alone will determine which property HMRC treats as your main residence.
There isn’t a set list of checks, but facts such as electoral roll registration, location of doctors and dentists, addresses used for bank accounts, location of childrens’ school are all examples of things to consider. Time spent is not the only factor. For sure, it’s a consideration, but only one item to consider.
In the U.K. buying and selling property is never a straightforward process. There can often be an overlap between buying and selling a home. What does this mean for PPR?
Again, there are a number of generous exemptions that can save you tax. The last 9 months of ownership of a property, that was at some point your main residence, will always be treated as if you were living there. So if you move to the new property and leave the old property unoccupied for up to 9 months, then you can still have a tax-free disposal.
What about buying a new property and not moving in straight away because of development or redecoration? As long as you move in within 24 months, HMRC will treat you as having lived there from day one, and therefore when you sell there’ll be no tax to pay.
There are plenty of other reasons why you might have time away from a property. Maybe your job requires you to live somewhere else, maybe family circumstances meant you had to be somewhere else. Depending on timing and reasons, even these types of situations may not disrupt your tax-free sale.
This is a complex area and whenever you are entering into a period of multiple home ownership it is always worth seeking professional advice.
Finally, if you sell a property, say a second home or a rental property, on which capital gains tax is due, there is now an obligation to notify HMRC and pay the tax within 30 days. If you don’t make the notification then interest and penalties can become due. Unfortunately, it seems not all solicitors advising clients are aware of this point. So do make sure you bring it up at the time of your sale.