Capital Gains On Homes: A Guide For Those Who Are
January 30th, 2012 | 
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Capital Gains On Homes: A Guide For Those Who Are Not MPs
As part of the expenses scandal it has come to light that some MPs have been deciding which of their homes is treated as their principal residence in order to save capital gains tax CGT.
The rules on gains made on property are fairly clear. As far as your main home is concerned there is no CGT to pay provided: it was primarily for use as your home rather than with a view to making a profit; that it was your only home throughout the period you owned it ignoring the last three years of ownership: and you did actually use it as your home. There are other rules which your financial or mortgage adviser can outline for you.
Importantly if you are married or in a civil partnership and not separated you and your spouse or civil partner can have only one such residence between you which may surprise some MPs. As far as second residences are concerned you will normally be expected to pay CGT on any gain you make after certain allowances.
Can you flip too?
The question is of course if MPs can decide which residence is their principal one can you do so too? The surprising answer is at least until the government moves to close this gap that you can. If you own and occupy more than one residence you can choose which one is to be your primary residence for CGT purposes subject to some restrictions.
This is particularly helpful for those who buy a holiday home with the intention of retiring to it later on. If they move to the retirement home a year or so before selling their main family home they can still opt to have the old home treated as their principal residence so that it is exempt from CGT. More importantly if they decide while still living in the main family home that the holiday/retirement home is in the wrong place they can usually designate the holiday/retirement home as their principal residence sell it buy another one elsewhere and then redesignate their family home as their principal residence. In this way just as for MPs there will be no CGT payable.
Let property
Where a second property has been let in order to generate an income it may be possible to obtain letting relief which can reduce the chargeable gain by as much as 40000 per owner. For most landlords 40000 represents a considerable gain that can easily be put towards additional needs such as landlords insurance.
How much will CGT be?
As indicated above a couple can only have one principal residence at a time but each has a personal allowance against CGT. For the current tax year this is 10100 per individual. So imagine that a married couple were to sell a property that did not qualify for relief as their principal residence for 500000 that they had bought some time earlier for 350000. This would make a gain of 150000. Each would be entitled to an exemption of 10100 so assuming equal ownership the taxable gain would be 129800. With the rate of CGT at 18 this would create a tax charge between them of 23364 provided no other chargeable gains had been made during the year.
If the property had been purchased with a view to passing it down the generations making the children joint owners from outset would mean that they too could use their annual exemption to reduce the liability.
You should take individual professional advice before making any decision relating to your personal finances and should be aware that there may be variations for those living in Scotland and Northern Ireland. Also remember that your home may be repossessed if you do not keep up repayments on your mortgage so you should think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser.
About the writer: Adam Singleton writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote but should be considered professional content.
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