Latest News

‘Flipping Elections’ – How to save tax on second homes

14
May

Flipping is a widely used term but do people really realise how powerful it can be as a tax saving tool?

It’s relatively common knowledge that your main residence is exempt from capital gains tax because of private residence relief which wipes out any capital gains. However when you own / rent / occupy more than one property the tax position is more complex. And remember if you are married or in a civil partnership you can only have one main residence between you (and incidentally although it may be the last thing on your mind, around the time of marriage it’s crucial to think about your combination of properties from a tax perspective).

Which property is my main residence?
If you do not inform HMRC to the contrary they will make a decision as to which of your properties is your main residence based on a matter of fact. This will normally depend on a combination of factors including which one you spend more time in, proximity to work and children’s school and which address is used for bills, doctor’s registration, car registration etc. However if you make an election as to which is your main residence you are perfectly free to choose any property provided it is used as a residence by you. To quote HMRC’s own guidance:

When nominating which residence is to be treated as the main residence, an individual is not obliged to nominate the residence which is factually his or her main residence; they may nominate whichever residence they choose.

Importantly once you have made this election you can revoke it, i.e. change your mind and elect the other property as your main residence. However if you have never made this election you have no such flexibility.

Worked example how a main residence election can save you tax:
If you imagine a scenario where you own two properties, both were purchased 10 years ago. Property A cost £100,000 and is now worth £200,000. Property B cost £300,000 and is now worth £850,000. If you sold both now you would realise total gains of £650,000, a nice return on your money. But that’s before tax.

If you had not made an election and HMRC deemed property A to be your main residence you could be facing a tax bill of around £148,000 because you will get no private residence relief on property B.

If however you had elected property B to be your main residence throughout your tax bill would be around £22,000 because you are benefitting from private residence relief on property B. What’s more with a bit more careful planning you could reduce the tax payable to £14,000 or even completely eliminate the tax by renting out property A for a period. That’s an impressive saving for taking some simple tax advice around time of purchase of the properties.

Conclusion / Recommendations:
The key point is if you own / occupy two or more properties then it is foolish not to make an election to HMRC. Nobody knows what the future holds, in terms of where you will be living, what a property will be worth or when you will sell, however by making an election you give yourself options and flexibility. Remember the election can be changed at a later date. If you don’t make an election you are stuck with the HMRC’s view as to which is your main residence, and this could be very costly.

The format and time limits for making an election are very strict. Ordinarily this election must be made within 2 years of acquiring the second property (or a change in residences) however there are exemptions to this in certain circumstances. Importantly an invalid election may be challenged by HMRC. These elections may also have impacts on your all round tax position therefore it is crucial you seek proper tax advice and have a full review of your tax position.

Norton Accountancy are property tax specialists and would be delighted to meet with you for an initial free consultation at our offices in London, Bristol, Cardiff or Newport. To get in touch please use the details below:

Email us on contact@nortonaccountancy.co.uk or ring us on:
Bristol : 0117 910 9858
Cardiff : 02920 567 366
London : 0203 3102 4185
Newport : 01633 547 409