By Andy Noton
Following new rules introduced last April, second homeowners could face a tax liability under new capital gains tax (CGT) rules on second properties.
As part of the Government’s efforts to crack down on tax avoidance, the rules around selling a property in which you used to live have changed.
Whilst selling your main home is still free of tax on the sale proceeds – including your profit - second properties may attract capital gains tax unless you use a tax break called private residence relief (PRR) which allows you to mitigate your CGT bill if you ever lived there. Good news.
But it’s not all good news. Before the crackdown, you would have been allowed to claim tax relief for the last 3 years that you owned the property, even if you were not actually living in it. This gave people time to sell their home in a ‘slow’ market, or sell due to marriage break-up, even if they had already moved to a new house. However, some homeowners were choosing to ‘flip’ properties (switching their designated main address so they could keep avoiding the prospect of having to pay tax on a sale) the government took steps to close the loophole. Thus, on 6th April, the exemption was halved from 36 to 18 months. This means that if you’re selling a second home and you moved out less than 18 months ago, there will still be no tax to pay. If you moved out, say, two years ago, you will now be hit by a CGT charge, accruing over time.
People choosing to let out their old home rather than selling it after moving out will normally be eligible for another tax relief – known as letting relief – which may further reduce or negate any CGT liability on eventual sale of the property.
For those who move on and fail to sell an old home within 18 months due to market conditions or other, personal reasons, then this change increases their risk of having to pay CGT when they do sell.
A further clampdown will take effect next year. Second home owners using the system to minimise their CGT liability can currently elect which residence is their main one for CGT relief purposes. But from April 2015, individuals will no longer be able to choose which of their homes to nominate. Instead it will be decided on objective grounds based on which property is genuinely the main residence for CGT purposes.
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