If you own two properties, you can currently decide which is your main residence and, consequently,which is exempt from Capital Gains Tax. Now, the Treasury is moving to limit the practice of flipping properties for tax purposes,leaving thousands of people facing a significant change.
Keep reading to find out more.
HMRC to decide which is your main residence
Currently, if you own more than one property you can choose with of them qualifies for private residence relief. This relief means you don’t pay any Capital Gains Tax on the profits you make when you sell.
Now, officials are consulting on a change that would mean UK residents with two homes would no longer be able to elect a main residence that is exempt from capital gains tax.Instead the main residence would be decided by HM Revenue &Customs.
The rules as they stand give relief from tax on profits made in the previous three years. This has allowed owners of multiple homes to ‘flip’ their main residence so that more than one qualifies for the relief. This allows them to reduce the tax charge when they sell.
The Government has already moved to reduce the relief from three years to 18 months, coming into force from 6 April. However, a recent Treasury and HMRC consultation paper on the treatment of non-residents contained proposed changes that would also change the rules for UK residents.
Changes will be significant
The Government wants to make non-residents pay tax on their UK property profits for the first time. However, in order to do this it needs to remove the ability for non-residents to elect a UK home as their main property, as would be possible under current rules. However, it also means removing it for UK residents.
The change will be significant for those with two homes, according to Patricia Mock, a tax director at Deloitte. She said: Lots of people in this position change the election of their main residence to whichever they feel will be sold at the bigger gain.
Changing this will be significant and will create a lot of extra work for the taxman. It’s not exactly clear how they will keep on top of it. Imagine a situation where person lives in London for the week but in the country for the weekend, it would be a big ask to keep records to show where is being used the most.