TWO HOMES AND THE TAXMAN
If you’ve sold your house and made a profit, should you tell the taxman?
Generally, the answer is no – gains from the sale of your home are normally tax free. But it isn’t always so straightforward. The profits can be taxable if, for example:
- The house has never been your home, but has always been let to tenants.
- You bought the house for your daughter to live in at university, but you own the house, not her.
- You and your partner both own your own houses – and then you get married or enter a civil partnership. Although two people living together are each allowed to have a home or “personal private residence” (PPR), married couples/civil partners are only allowed one between them. So if you and your partner have a home each, and get married, one home is now treated as your PPR. If you sell the other one, there could be a tax bill.
- You own your home, get divorced and let your ex stay in the house. It isn’t your PPR anymore, so when it is sold, part of the gain may be taxable.
- You have two homes – perhaps a London house and a holiday cottage. Only one of them can be your PPR.
Important things to know include the following:
- If you have a second home – for instance, a holiday cottage – you can choose which one counts as your PPR.
- If you get married or enter a civil partnership, you must both choose the same PPR.
- You have two years to make your choice, starting from the day you have two homes.
- Once you have made a choice, you can change it at any time.
- If a property has ever been your PPR, the last 3 years of any gain on sale is tax-free. So if you have two homes, don’t forget to make elections for both of them to be treated as your PPR, see the example.
Maggie is a 40% taxpayer with a house in Wolverhampton. She has lived there for 20 years.
- In January 2009 she bought a small cottage in Ludlow where she goes for weekends.
- In May 2009 she elected for the Ludlow cottage to be her PPR, by writing to her tax office.
- In June 2009, she wrote to HMRC again, electing her Wolverhampton house as her PPR.
- In January 2012, she sold the cottage in Ludlow for £25,000 more than she paid.
- In February 2012, she sold her house in Wolverhampton for £50,000 more than she paid.
The Ludlow cottage is treated as having been Maggie’s PPR for three years, even though it was only “elected” for a month. As she has owned it for three years, this election protects her from a tax liability, and she pays no tax on the £25,000.
If she hadn’t made the election, the £25,000 would have been taxed at 28%, after deducting her tax-free CGT allowance of £10,600. So her tax would have been £3,600 (£25,000-10,600 x 28%).
Maggie also pays no tax on her Wolverhampton house, because it has been her PPR for a very long time, except for the one month when she “elected” her Ludlow cottage. A small part of the gain on the house would be taxable, but as it was below the tax-free allowance of £10,600, no tax is due.
Making the PPR election saved Maggie around £3,600 of tax.
The important thing to remember is to think ahead – don’t wait until you are just about to sell your house. And remember, getting married or entering a civil partnership can give you unexpected tax problems.
You can find more about the tax advantages, and the tax traps, of selling your home by looking at the HMRC website at http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm
Anne is a visiting professor at King’s College, London and a barrister at Temple Tax Chambers
The information contained in this article is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document.