Two homes - maximising private residence relief

If you own a second home you can choose whether it or your normal home receives capital gains tax private residence relief (PRR). As strict conditions apply, what steps should you take to maximise relief?

Private residence relief

For many years the capital gains tax rules relating to the sale or transfer of private homes stayed largely unchanged. More recently that’s not been the case. In particular, there have been significant changes to private residence relief (PRR) . It’s been watered down in some respects and improved in others. We’ll look at the key factors for maximising PRR where you and your spouse or civil partner own two more properties.

Two or more homes

You can choose which of them gets the tax relief. You have two years from the date on which you had more than one qualifying property in which to notify HMRC of your choice.

Trap. If you don’t choose HMRC decides which property gets PRR. Whilst it won’t be its intention to disadvantage you, it will usually apply PRR to the property occupied by you the most. This won’t necessarily result in the best outcome for you.

Example. Jack and Gill are engaged. They each own one home and therefore each qualifies for PRR . When they marry only one property can qualify even if both properties are used as homes. Jack and Gill spend most of their time in Jack’s property but can choose which of the two gets the PRR. Gill owned her property for eight years and at the date of marriage whereas Jack bought his home two years before they married and it’s worth £15,000 more than he paid for it.

Three years later they sell both properties in the same month and buy a single home. Jack got £45,000 more than he paid for it and Gill £140,000 more than hers cost. If HMRC decided which home received PRR from the point of marriage it would likely plump for Jack’s as that is where the couple spent most of their time. However, that would result in almost £8,500 more gain liable to tax.

Variation possible

Based on the figures in our example Jack and Gill ought to have given notice to HMRC within two years of their marriage if they wanted Gill’s home to be treated as their main residence for PRR purposes. However, that begs the question: what if the value of Jack’s home leapt or Gill’s plummeted soon after they had notified HMRC, meaning they would been better off nominating Jack’s home?

Tip. Once a nomination for a property is made it can be varied as many times as you wish and for up to two years retrospectively. That means if Jack and Gill notice a shift in property values which makes their original choice less efficient for PRR purposes, they can notify HMRC to change their mind.

Trap. If you don’t make a choice you’re stuck with HMRC’s decision unless or until you acquire another property to which PRR could apply.

Tip. It’s therefore always better to make a choice and notify HMRC. That way if it begins to look like you made the wrong call you can change it.

Within two years of having two or more homes you should notify HMRC which of them PRR should apply to. Once your nomination is made you can vary it. If you don’t make an election, HMRC is able to decide which property qualifies. This might not give you as much PRR as would have been possible if you had made a nomination.