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 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 18 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 a 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.
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 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.
It is advisable to always take professional advice when purchasing a second home.
How Nelsons can help
Helen Salisbury is a Partner in our Wills, Trusts & Probate team.
If you would like further advice in relation to this subject, please contact Helen or another member of the in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.