Owning a Second Home
Some of our MP’s who were caught out in the expense scandal were criticised for claiming the cost of a home in London and also for not paying capital gains tax when that property was sold. But the exemption from capital gains tax is wholly legal – how was this achieved?
Our home is normally exempt from capital gains tax (subject to various conditions). But when a property has been your home at some time in the past there are additional elements to the relief. In particular, the last three years in which the property has been owned will be exempt from tax. So you might live in a house for 5 years, then let it out for the next three years and then sell. The property will be wholly exempt from capital gains tax as the last three years exemption covers the exact period when the owner was not living in the property.
When a taxpayer has two residences available you can elect which of the two is your main residence. The election should be sent to the Revenue within two years of the date on which you first have two residences available, and it can cover a period of up to two years before the election has been made. As a consequence of making an election then, at the very least, the next three years of owning the elected property will be exempt from capital gains tax. This is so even if in the very next week you elect for a different property to be your main residence. Therefore it is perfectly possible to own a house in the Country as well as (for three years) a flat in London and, if you follow the rules carefully, both properties will be exempt from capital gains tax.
When you die there is no capital gains tax payable in relation to properties which you own at that time. Accordingly, if you expect to keep a particular property for your remaining lifetime you would normally choose to elect that another residence which you expect to sell eventually is your main residence. Note that the emphasis is on residence; if a property has not been occupied as your residence then it will not qualify.
A further relief applies to a property which has been your home and is later let out. The calculation is complex so we will not explain it fully here but the potential relief is £40,000, or £80,000 for a married couple who own the property jointly. Capital gains are calculated for the full period of time in which you own a property and are then allocated pro rata on a time basis. For example, if you own a property for ten years in total of which you were living there for five years and then letting the property for 5 years, the exempt total is the first 5 years plus the last 3 which thus leaves two years liable to tax. The "taxable" gain is then the total gain (selling price less purchase price and improvements, and less legal and professional fees etc) multiplied by 2/10. But you can then deduct the further potential relief of up to £40,000 per joint owner, and may well find that there is no actual tax liability in this scenario.
Various relief's can apply when the owner of the property or their spouse is in employment overseas, or is prevented from occupying their home in consequence of a condition "reasonably" imposed by their employer.
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The above information is only a general guide. We cannot accept responsibility for the financial consequences of any transaction that you may undertake or refrain from undertaking based upon the information given on this website.