A second or subsequent property
Second properties may be held as a ‘weekend home from home’, a holiday property, or for renting out to others, or even purely for investment purposes, and all of them may increase in value over time, with a potential CGT liability if disposed of at a gain. The gain would be computed based on the proceeds of sale net of legal costs, agents’ fees etc., less original costs plus any capital costs such as improvements etc., and with no deduction for inflation, unlike companies, which get a deduction worked out on the value of the Retail Prices Index between sale and purchase.
What can be done?
There is, however, a way of minimising the CGT on the disposal of a second property, utilising the PPR exemption and the nomination rules. Owners of second or subsequent properties, in which they live for at least some of the time, have up to two years from the date of purchase of a second or subsequent property to nominate which property is to be treated as their PPR.
Once a PPR Election has been made, it can be varied: it is not ‘set in stone.’ A property which has been treated as a PPR by election will acquire partial exemption from CGT on disposal, represented by the period actually lived in as PPR, plus the last 18 months of ownership, and any of the above exempt periods which may apply.
Married couples may only have one PPR between them, and must elect jointly on the same property.
The election is not available on properties which have never been occupied by the owner, nor to properties which are being occupied by others at the date of the election.
There is another valuable exemption from CGT which is open to properties which have been a person’s PPR, and which have been let residentially, either in whole or in part, to others. The period it was so let will attract exemption of the lesser of
- £40,000.00 per owner, or
- the relief attributable to owner occupation.
This relief is not available to properties which were never the owner’s PPR, nor those let for industrial or commercial purposes.
Property occupied by a dependent relative
If a person owns a property which is being occupied by a dependent relative rent free, and has been so in the same occupation since before 6th April 1988, any gain arising on disposal will attract the PPR relief. A dependent relative is
- a relative who is unable to maintain themselves due to old age or infirmity, or
- a widowed, divorced or separated mother.
Those who are relocated due to work commitments and sell their home either to their employer or a relocation service, and are entitled to share in the gain on any subsequent disposal, can benefit from the relief.
Job related accommodation
Those living in job related accommodation and who own another property, may have the other property treated as their PPR, so long as they have the intention to reoccupy in the near future.
For PPR relief to operate, it is essential that the property was actually occupied as a PPR, i.e. there must be some degree of permanence to the occupation. This could include having all private correspondence addressed there, getting on the Electoral Roll for the locale, spending the majority of one’s time there, or being based there. It may be necessary to demonstrate this to HMRC should they enquire into a sake on which partial or complete exemption is being claimed on the disposal of a former PPR, so the importance of keeping records cannot be stressed too highly.
This is a complex area of taxation, and needs careful planning.If you have bought a second property in the last two years, or are thinking of doing so, please contact us for advice.
Capital Gains Tax has been around since the mid 1960’s, and is raised on the capital gains made on the disposal of assets above the annual exemption threshold, currently £11,000.00 per person, in a particular tax year, running 6th April – 5th April. Any capital losses made in the same year are netted off against the gains, and if there are still gains above the annual exemption, then any losses brought forward from previous years are netted off, down no further than the level of the annual exemption. Any gains left after this are charged at either 18% or 28%, depending on how much of the basic rate band (currently £31,865.00) the individual has left after taxing his or her income. Any losses brought forward and not used up in this way can be carried forward to future years, to be used against the first capital gains above the annual exemption for that future year.