As confirmed in the Budget, as of 6 April 2014, the amount of time homeowners have in which to sell a second home before being subject to capital gains tax (CGT) has been halved from 36 to 18 months.
CGT normally applies to the sale of second homes – generally, there is no CGT to pay on the sale of main residences (by virtue of ‘Principal Private Residence [PPR]Relief’) provided, during the entire period of ownership, it has been the only home or main residence and it has been used solely as a home. Even those who have not lived in their main residence for the entire period of ownership may still qualify for full relief, thanks to the ‘deemed occupation rules’, if periods of absence meet certain conditions, such as absences of up to 4 years for work in the UK and, of course, the final period of ownership.
Waiving the requirement for actual residence during the final period of ownership was initially designed to avoid penalising those who faced difficulty in selling an already-vacated property, for example due to a stagnant property market. Although it could be argued that reducing this period to 18 months is a reflection of the liquidity in the property market, it is inevitable that, innocent buy-to-let investors, holiday home owners and those going through divorce, amongst others, will face an increased tax bill as a result.
The main reason cited by HMRC for this 18 month reduction is an attempt to reduce the effectiveness of ‘property flipping’ as part of a general clampdown on those who use PPR to engage in tax avoidance.
‘Property flipping’ in this context refers to the ability of those who own more than one home to elect which is their main residence, provided this is done within two years of buying their second property. They can then vary their election and, in fact, switch the nominated ‘main residence’ between different properties as often as they like, so long as HMRC is notified each time. To qualify for PPR relief, a property must have been selected as the main residence at some point, thus CGT relief can be obtained on both properties – clearly an unintended consequence of the legislation!
During the expenses scandal in 2009, it emerged that many MPs had engaged in such property flipping and thereby taken advantage of this tax loophole. In addition, many holiday home owners and landlords wanting to sell a second property have registered their second property as their main residence for a very short period – even as little as a month – thereby attracting CGT relief and removing both properties from the tax net.
It is evident that halving the final period of deemed occupation will go some way towards reducing the effectiveness of property flipping. Some welcome the change as they predict that this will effectively stop people holding on to two main homes for as long as 3 years, thereby freeing up housing stock. The change also does not rule out all tax planning opportunities. We are happy to discuss your individual circumstances and assist you in such planning.