The Main Residence Election

Last month we looked at the incredibly valuable exemption for taxpayers who own their own home which means that the largest investment made by most taxpayers during their lifetime is exempt from CGT.  However we also saw that it is the gain that is exempted, not the house itself, so there are circumstances in which part of that gain may be chargeable if the house was not occupied as a person’s main residence throughout the whole of the period of ownership.

We also saw that a lot of taxpayers in recent years have tried to claim that a property that they own as an investment has been their residence, but they often fall short by being unable to demonstrate that they have actually resided in the property at some time.

We also saw that it is possible to own more than one residence at the same time – consider our dear Queen’s many residences – and this brings us on to what I’m going to focus on in this podcast – the Main Residence Election which can be one of the most valuable weapons that a wise taxpayer can bring to bear if they own more than one property.

Let’s consider a common situation where this problem arises – husbands and wives and civil partners can only have ONE main residence between them.  Yet when they get married they may each own a residence – what happens then?

Last month we saw that the last three years of ownership is considered to qualify as exempt “in any event” so following marriage the couple could decide to sell one of the two properties and, as long as it didn’t take more than three years for them to sell it, it would still qualify as an exempt gain.

What happens if they decide to retain the properties and occupy both properties as a residence and then sell one of them at a much later date?  On sale you would expect part of the gain to be chargeable as both properties cannot benefit from the exemption at the same time – it would possibly no longer be covered by the exemption – but which one will be exempt and which chargeable and for what periods?

There are two ways to decide which of two properties is the “only or main residence”.  The first is simply fact – which of the two properties was in fact the main residence – that will then give the exempt gain and the other will be chargeable.

Before self assessment came in it was the revenue who could decide which property was to be treated as exempt but it is now a question of fact.

Now comes the interesting bit – the second is that a taxpayer with more than one residence can elect to decide which one, at any point in time, will be treated as the main residence, and this leads to some quite remarkable tax planning opportunities.

The election is found in section 222 subsection 5 of the Taxation of Chargeable Gains Act 1992 and it is worth considering the actual wording…

“So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period… the individual may conclude that question by notice to an officer of the Board given within 2 years from the beginning of that period but [and this is where it gets really interesting] subject to a right to vary that notice by a further notice to an Officer of the Board as respects any period beginning not earlier than 2 years before the giving of the further notice.”

So two or even more residences can be involved and the revenue have no power to interfere with the giving of the notice or its subsequent variation provided that the original election was made.  It is, of course, necessary to show that the property has been the taxpayer’s residence and as we saw last month this is more than just sleeping in the property occasionally.

But – if we can demonstrate that, then we have these two valuable rights – yes two – and the second is the more important in planning terms but it is conditional on the first.

You cannot vary a notice that has not been given and so the first job is to make the first notice even if you do not think it is necessary – let’s look at an example:

Alan bought the house that his family lives in in 2002 and then, on the 13th of May 2010 bought a seaside cottage in which they planned to spend five or six weeks each year and as many weekends as they could.  It is obvious that the house bought in 2002 is still their main residence IN FACT and so Alan might not think it necessary to make the election under s222(5), probably he won’t even be aware of the fact that he can make the election.

Let’s suppose he didn’t make the election and they sell the cottage in May 2015 realising a gain of £60,000 which he intends to plough back into buying a larger cottage in a more select resort.  That gain will be chargeable and even though he is using the proceeds to buy another house there is no relief available on sale.

But what if he did make the election?

He needs to elect that one of the two properties is the main residence by 12th May 2012 (so that the original notice is WITHIN two years of the second or subsequent property becoming available) because this is the key which unlocks the right to make the subsequent variation.

Having given that notice Alan can now give a notice to the revenue to vary the original notice so that the seaside cottage becomes the main residence, and then he can vary that notice so that the main house becomes the main residence again.

The revenue publish manuals on taxation on their website which give their own interpretation of the legislation and the example which explains how this election works used  to point out that the interval between the two notices could be quite short – in their own example ONE WEEK only – but it would still be sufficient to qualify for the last three years of ownership in any event.

So Alan can send two letters to the revenue a week apart making the two variations and then, having owned the seaside cottage for five years three of those years would drop out of account – more than 60% of the gain would now be exempt – a tax saving of £10,080 for the price of two postage stamps!

The variation can be made retrospective by up to two years and so Alan has until May 2017 to give the necessary notices – two years after the property was sold!  This is one of the vary rare instances where elections can be made to vary liability even though the subject of the election is no longer owned.

He could elect for a longer period than one week to be exempt and that would increase the period that would be exempt, given at the right time the whole of the gain could be exempted in this way, although for Alan the optimum might be about 80% of the gain – so four years or so would become exempt out of five as the remaining gain would be covered by his annual exemption which is currently £10,600.

But Alan needs to think about the effect which the election will have on his other residence – the one which is his main residence… by making the election in respect of the cottage the main residence becomes chargeable for a corresponding period.  Now that might not be a problem – after all on sale that will also be entitled to the last three years exemption which could cover that period.

You should also note that this period of three years was originally two years and was extended to three when in earlier years there was a period of property recession and properties were hard to sell, the legislation does give the power to the government to reduce the last three years back to only two years.

This now begs the following question – can a landlord of a buy-to-let property use this election?

The answer is a qualified yes! – the property in question must have been, at some time, a residence for that person, simply staying in it overnight won’t be enough, even five weeks might not be enough as we saw, but it is the quality of using it as a residence which counts, not the length of time, and it will be necessary as well to have adequate evidence of the property having been a residence.

Let’s suppose that Mick and Mary own a main residence which they live in with their family and then Mick inherits a house in another town which is let to an elderly tenant at a reduced rent.  He decides to put this house into the joint names of himself and his wife, this is an exempt disposal because they are married and Mary’s period of ownership will be deemed, by s222(7), to start when Mick inherited the house, so they will be treated as jointly owned throughout the whole period of ownership.

After a year the old lady dies so the property is now available to be occupied as a residence.  Mick and Mary realise the advantage of the property having been their own residence and so they arrange to spend time in it, sufficient for it to be considered another residence, and then give the first notice in respect of their actual main residence.  This must be done within two years of the tenant’s death as it was not available to be a residence until she died and the property became vacant.

Now they can let this property and at the optimum time make the necessary variations in respect of it as a result of which not only will it qualify for the last three years of ownership in any event but it will also, as we saw last time, qualify for the letting exemption of a further £40,000 each!

As the house is jointly owned the notices must be signed by both of them.  There is no special form for this purpose it is sufficient to write a simple letter explaining that it is a notice, or a variation of a notice and signed by the joint owners.

What if you miss the deadline of two years for the first notice?  Remember it applies where there are 2 OR MORE properties involved – each time a further property is acquired [or indeed sold] the right to give the notice is revived and then, once given, can be varied as many times as you choose.

Clearly a buy-to-let landlord cannot simply buy a property, live in it overnight and then claim it as a residence, but with careful planning it is feasible that a person’s affairs could be arranged to gain the benefit of these provisions.

This is also one of the situations where unmarried partners arguably have an advantage over the married or those in civil partnerships as each is then entitled to a separate residence and can have two residences simultaneously, both exempt.

There is also special provision in the act where a property is owned by a trust and occupied as a main residence by the beneficiary of the trust under provisions contained in the trust – in a future podcast I’ll look at some of the many opportunities that arise with trusts and main residences, particularly for dependant relatives and children.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of the podcast can be read at my site

For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

Until next year!… 2012 that is!