Another Flipping Election!

13 February, 2014
by: Cripps Pemberton Greenish

Whatever the outcome of a General Election it is good to know that there is one election that will definitely save you tax. And it’s one that has been used to good effect and seemingly endorsed by those seeking our votes.

We all know that our homes escape Capital Gains Tax (CGT). The actual mechanism is a tax relief called Principal Private Residence Relief – PPR Relief for short. Gains made on the disposal of “an individual’s only or main dwelling house” are effectively exempt from CGT. “Only or main” is easy when there is one. But what about for those lucky enough to have two or more?

Couples owning two properties may be thinking two houses, two individuals, one main residence each. That’s fine if you are not married or in a civil partnership, but not if you are. Perhaps not unreasonably it is reckoned that those sharing their lives and worldly goods also share a main residence.

But you can determine which of your residences is to be taxed as your main residence. By making a simple election.

Why elect?

The obvious answer is to save the most tax – i.e. relieve the biggest gain. If your two properties have increased in value by different amounts it makes good sense to elect the property with the biggest gain. A good guiding principle but needless to say it is not quite that simple.

It is probably more accurate to say that rather than having one main residence you can only have one at a time. Having made an initial election you can chop and change to your heart’s content. But in so doing only the residence then elected is taxed as your main residence during the period the election stands..

Exactly which residence you chose will depend on a number of factors – there may be periods when one or other residence is let or the amounts invested in improving one property will reduce the eventual gain to manageable levels without the need to make it your main residence for tax.

The less obvious answer is – otherwise HMRC will choose for you, and that will be on a question of fact: which did you actually use as your main residence when, and there are a number of factors for determining that.

The Two Year Rule

You must make the election within 2 years of acquiring the additional residence. If you don’t elect immediately you can still claim the period between acquisition and the date of the election (so in effect you can back date the election by up to 2 years).

Varying an election – “flipping”

Once you have made that initial election you can change it as often as you wish. But bear in mind that like the initial election any change can be backdated by up to 2 years only. So if in 2000 you owned your house in the country, in 2005 bought a flat in London, made your election within 2 years of buying the flat, electing the country house as your main residence and in 2010 varied your election electing the flat as your main residence, the flat could only be treated as your main residence from 2008 at the earliest.

So far so good. But here’s where it gets better.

The 36 month Rule

This rule says that the last 36 months (3 years) of ownership of any property which at some time has been a main residence is exempt. At first glance this looks particularly good if you are selling at the end of a property boom (remember those) and not if you are selling in a slump. But that is not quite how it works.

Calculating your Gain

Gains are time apportioned – that is to say the whole gain (after allowable deductions such as expenditure, acquisition and disposal costs etc) is apportioned over the whole period of ownership – so if in the example the flat increases by £150,000 over 5 years after which it is sold (2010) then it is treated as increasing at the rate of £30,000 per annum, not £100,000 in the good years and £50,000 in the bad. So rather than taking the “last 3 years” you exempt (here) 3/5ths of the total gain.

In our example the flat was elected main residence from 2008. And until then the country house was the main residence. The effect of the election therefore is to deny PPR relief on the country house for 2 years (2008 to 2010) but give 3 years of PPR relief on the flat (under the 36 month rule). That overlap would be more if the period during which the flat was the main residence was shorter. In an extreme case 2 years and 11 months.

Unlike the election which can apply only to one property at a time the 36 month rule applies to any property that has been your main residence. So if you have at any time elected your second property as your main one you suddenly have two lots of exempt 36 months – one on each house.

And that’s what has brought “flipping” into the headlines.

Further properties

Adding a third property to your burgeoning portfolio gives another opportunity to make that first election. In fact you are able to make an election (within 2 years of course) of changing the combination of residences ie whenever you acquire a new one, or sell an existing one. It is suggested that merely renting a property is enough to constitute a change in the combination and so create the opportunity to elect.

Which way to vote

While we like to think we can advise on most things we can’t help you on how you vote in a General Election. But armed with the facts we can certainly help you make the right election on your main residence. And with taxes set to rise whoever gets elected the right PPR election might actually deliver more than the right government.