Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from December 2002. Older articles are accessed through our main Property Tax page.

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Isis Financial Planners offers tax planning advice as well as a Tax Self Assessment Service.

My husband and I have lived in the same house all our married life and we love it dearly. However, now that our children are teenagers it is just too small for us all. If we bought and moved to a larger property until the kids went their own ways but then moved back when there were just the two of us, how would we stand on Capital Gains Tax?

Maggie Fleming writes:

I assume that you would let the first property while you were living in the second and that you would sell the second property when you moved back into the first. I assume also that the properties would be held in both names. If that were the case, on the eventual sale of the first property you would be entitled to private residence relief for the total number of years you had lived there since 1982, for the final three years of ownership and up to £80,000 exemption for any gain relating to the period when it was let. You would also have the benefit of indexation allowance and taper relief. The gain on the second property would be totally exempt, as it would have been your only or main residence throughout your period of ownership.

From what you have said, it may well be that you will keep your original home for the rest of your lives and leave it to your children. In that case there will, of course, be no Capital Gains Tax (CGT) to pay.

In the unlikely event that you did not let the property but kept it for your own use, you would be advised to elect one of the properties to be treated as your main residence - this would not have to be the one where you spend most of your time. The election must be made within two years of acquiring the second property and can subsequently be varied. You should seek professional guidance on which property to choose.

I understand that the owner of two residential properties may "elect" which is their "main residence" for capital gains tax purposes on the sale of either. Can that be true? Or is it a question of provable "fact" rather than a matter of choice?

Maggie Fleming writes:

It is not quite as simple as that. Both properties have to be places where you reside - for example, a flat in London which you use during the week and a house in the country where you spend weekends and holidays. Secondly, the election must be made, in writing, within two years of acquiring the second residence - although it can be backdated to the date of purchase. Provided that a valid election has been made, it may be varied at any time thereafter and the variation can be back-dated by up to two years.

Where an election is made, the nominated property does not have to be the factual main residence; in other words, it does not have to be the residence in which you spend most of your time. You would normally select the property which stood to realise the largest capital gain on sale.

If no election is made within the two years, it becomes a question of fact and an inspector would want to know in which property you spend the majority of your time. If you and the Inland Revenue disagree, they would look at such factors as where you are registered for council tax and to vote, what address is shown on your driving licence (and tax return!) and where you are registered with a doctor.