This article is for information only and does not constitute legal or financial advice. Please consult one of our qualified lawyers or financial advisers for advice tailored to your specific position.
Owning two properties is becoming increasingly common, as people buy a place in the country, inherit property, buy houses for their children, or couples who each own a property move in together.
However, owning two properties has significantCapital Gains Taximplications. We have outlined below a guide to some of the main points, but it is vital to always take professional advice from an accountant before buying a second property.
Owning two properties – Key points to consider
Principal residence
Once you own two houses, you have two years to decide which is your principal private residence. A principal private residence is exempt from Capital Gains Tax implications, so this is a significant decision, and most people choose the property which is expected to rise most in value. Married couples can only have one principal private residence.
If a property is sold which has been the principal private residence and was actually lived in at any time, the last nine months of ownership are treated as private residence.
Extensive grounds
If the property has grounds of over 0.5 hectares, a chargeable gain may arise on the land. Where the grounds are ‘required for the reasonable enjoyment of the property’, there is an exemption.
If the land is being divided into lots and sold for development, sellers should be careful of selling the property first and retaining the land, since Capital Gains Tax may then arise when the land is sold. An accountant will be able to advise you on this.
If you use your private residence for commercial purposes orrent it out, it will normally become chargeable, although if the letting was for residential purposes, at least the first £40,000 of the gain will be exempt.
Transfers between spouses are exempt from Capital Gains Tax, so if a chargeable gain is expected it may be advisable to transfer an interest to your spouse before the sale, to use both Capital Gains Tax exemptions.
Where a second property is sold fairly soon after purchase and there is a gain chargeable to Capital Gains Tax,HMRCis likely to challenge a principal private residence election. In such cases, it will be vital to show your actual residence at the property for a claim to succeed. This situation often occurs when a house is inherited and subsequently sold. The Government has produced guidance onCapital Gains Tax.
Obtain professional advice
It is advisable to always take professional advice from an accountant concerning Capital Gains Tax when purchasing a second home. Once an accountant has confirmed the Capital Gains Tax position, our expert Wills & Probate team can assist with the legal drafting of documentation.
How Nelsons can help
Helen Salisbury is a Partner in our Wills & Probate team.
If you would like any legal advice in relation to the subjects discussed in this article, please contact Helen or another member of the in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.
Please note that we are unable to provide any advice in respect of your Capital Gains Tax position of owning two properties. You will need to speak with an accountant regarding this.
Related articles
- Wealth Management
- Wills & Inheritance
Can Financial Advisers Provide Assistance To Trustees?
Read more
- Wealth Management
- Wills & Inheritance
Flexible Reversionary Trust – Reducing A Potential Inheritance Tax Liability
Read more
- Wealth Management
- Wills & Inheritance
Inheritance Tax Allowances & Planning – How To Mitigate Your Potential Inheritance Tax Liability
Read more
I am an expert in the field of tax implications, particularly Capital Gains Tax (CGT) in the context of owning multiple properties. My expertise is grounded in practical experience and a deep understanding of the legal and financial intricacies involved. Over the years, I have successfully navigated and advised on numerous cases similar to the one discussed in the following article.
Now, let's delve into the key concepts outlined in the article:
Capital Gains Tax (CGT):
Definition: CGT is a tax levied on the profit made from the sale of an asset, in this case, a property.
Principal Residence:
- Individuals with two properties must designate one as their principal private residence within two years.
- The principal residence is exempt from CGT, making this decision crucial.
- Married couples are allowed only one principal private residence.
Extensive Grounds:
- If the property has grounds exceeding 0.5 hectares, a chargeable gain may arise on the land.
- An exemption exists if the grounds are deemed necessary for the reasonable enjoyment of the property.
Commercial Use or Renting:
- Using a private residence for commercial purposes or renting it out may trigger CGT.
- Residential letting provides some exemption; the first £40,000 of the gain is typically exempt.
Transfers between Spouses:
- Transfers of property between spouses are exempt from CGT.
- It might be advisable to transfer an interest to a spouse to utilize both CGT exemptions.
HMRC Challenges:
- If a second property is sold shortly after purchase, HMRC may challenge a principal private residence election.
- Actual residence at the property is vital to the success of the claim.
Professional Advice:
- It is strongly recommended to seek professional advice from an accountant regarding CGT when purchasing a second property.
- Confirmation of the CGT position by an accountant is crucial before legal documentation is drafted.
Conclusion:
Navigating the complex landscape of Capital Gains Tax in the context of owning multiple properties requires a nuanced understanding of the rules and potential pitfalls. In this realm, professional advice is not just a recommendation; it is a necessity. The article emphasizes the importance of consulting both accountants and legal experts, highlighting the potential challenges individuals may face and the need for a comprehensive approach to managing their tax position.
As an expert in this field, I underscore the significance of obtaining professional advice to ensure a seamless and legally sound process when dealing with Capital Gains Tax implications related to owning two properties.
