Owning Two Properties – Capital Gains Tax

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 significant Capital Gains Tax implications. 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 that 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 having regard to the size and character’, 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 or rent 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, HMRC is 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 on Capital 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 and Probate team can assist with the legal drafting of documentation.