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Ways To Avoid Tax On Your Second Home

More and more people are taking tentative steps to owning a second home. It may be a holiday home for themselves, a holiday let, a buy-to-let, but the property boom and changes in British society such as delayed marriages and increasing levels of divorce have all contributed to more people owning more than one property than ever before.

With more homes in ownership also comes the possibility of the sting of an increased tax bill. There are ways that people who have spent money on a second home and maybe in renovating or improving it can limit their liability to the government’s tax coffers.

In the first place, everyone’s principal private residence (PPR), as your main home is called, has no capital gains tax (CGT) attached to it when you sell it, but a second or any other property is subject to CGT when sold.

A married couple can only own one home as a PPR, but an unmarried couple can each own a home that can qualify as a PPR.

It is also possible to cut CGT bills by living in the second property part of the time. There are special rules for properties that have been a main residence. The period that it was used as the main residence is not counted, and neither is the last three years of ownership. Thus, and time that a home was rented out can be exempt from tax.

For a second home, an owner has two years to choose which home is their PPR, and they do not have to be living in it at the time. After those two ears, they will lose the right to choose and the would have to prove they were living in the second property in order to avoid CGT. That two year election period can be used and taken advantage of, but if not, then if a third property is purchased or if the second property becomes the PPR for a time, the election period can be revived.

However, this will mean transferring postal, bank and electoral details for the particular period to demonstrate that it was you primary residence, and at the same time, you could rent out you main home. Such a move to the second home will mean that the first home is liable for CGT while living in the second home, but over the long term, if moving back to the main home, this should not be an issue.

If you rent out a home, it is subject to up to £40,000 worth of letting relief. As main homes are included in this, if they have been let out, and properties shared by married couples are included too, this gives a couple up to £80,000 letting relief between them. Private letting relief can be claimed up to £40,000 and must be the lower of the amount of principal private residence relief being claimed, or the capital gains made during the letting period.

To give an example, Tom is planning to sell his flat, which he bought five years ago for £130,000. He lived in it for a year, before moving in with his girlfriend and letting the property. Tom and his girlfriend are getting married and he wished to sell the flat for £230,000 to finance a move after the big day. The first year is exempt from CGT, as it was Tom’s main residence; the final three years are also exempt, as the home was once his main residence, leaving only one year exposed. If we assume that the capital gain is spread equally over the five years, the exposed sum is £20,000 and because this is lower than the £40,000 letting relief, no tax should be payable.


Tom Smith
13th June 2007

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