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As most people will know the sale of a main residence is exempt from Capital Gains Tax (CGT) providing the property has been the only or main residence throughout the period of ownership or throughout that period except for any part of the last three years. In addition a former main residence which is let outside of the last three years of ownership can benefit from letting relief which can exempt gains of up to £40,000.
What is less well known is the ability to make a main residence nomination or election where individuals have more than one home. You can only have one main residence which qualifies for exemption at any one time. However if you acquire a second home you can notify HMRC within two years which one is to be exempt for CGT. If no election is made HMRC will decide on the facts which one is the main residence and this may not necessarily be in your favour.
As well as for people owning second homes this issue also crops up sometimes when couples marry or register as civil partners with each party already owning their own home. Married couples or civil partners living together can only have one qualifying residence and have the opportunity to jointly elect which one should be exempt. The election needs to be made within two years of the marriage/registration. The property which is nominated will continue to benefit from the exemption. Although the exemption for the other property will then cease it will still benefit from the relief up to the date of the nomination and as noted above the last three years of ownership will in any case be automatically exempt.
A further benefit of making the election is that once made it can be varied at any time to notify a change of choice of exempt property. There are potential CGT planning opportunities around this ability to change the election but care is needed. You obviously cannot nominate a property that you have never used as a home.
Sometimes I come across situations where people have missed the two year deadline for making the nomination. In some cases it can still be possible to find a further opportunity to make the election. For example a second property which is let for a period of time and then becomes available for use as a second home will potentially start a new two year period to make the election.
Private residence relief is a very valuable exemption combined with the final three years of ownership rule, letting relief and the second property nomination - make sure you make the most of it.
Graham Arnott, Tax Director
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