Did she or didn’t she? A row over Angela Rayner’s tax affairs has been building for weeks and, if the Conservatives have anything to do with it, won’t go away now.
The issue is over whether or not the deputy leader of the Labour Party has paid the right amount of capital gains tax on the sale of a former home in 2015 which sold for around £50,000 more than she bought it under the Right to Buy scheme.
While she continues to refuse to publish the tax advice she says confirms she has done nothing wrong I cannot speculate on what may or may not have happened.
But I can set out how capital gains tax (CGT) is charged on property – and how you can legitimately cut your tax bill.
How is capital gains tax charged on property?
Tax relief on your main home has been in the legislation since CGT was first introduced in 1965. Despite that there are still issues that property owners can find confusing, particularly when it comes to second homes.
The fundamental rule is that the gain on your main home, known as your principal private residence (PPR), is tax free if it has been your PPR throughout your period of ownership. The justification for this exemption is that Parliament recognised that people need to change where they live for domestic reasons such as to accommodate a growing family or changes in your employment. Policy makers did not want the rules to provide a disincentive for doing so.
Where a property ceases to be your PPR, while still in your ownership, the general rule gives relief on a time apportioned basis without regard to the actual value of the property when you move out. In general, you can only have one PPR – but there are some exceptions.
As we all know, it can take time to sell a property and sometimes you need to buy your new home before you are able to sell the old one. The old property may remain empty or might be let out for a period until the market improves. In these circumstances the law allows a period of grace during which the old property continues to qualify.
Until April 2014 this period was three years. The grace period then reduced to eighteen months until April 2020 when it was cut again, to nine months. The period remains at three years, however, where someone is disabled or moves into a care home. Full details on this are in the HMRC manuals here.
Capital gains tax when you have a second home
Some people have two or more homes. Most commonly this is a holiday home or where a family wants a place in the country but keeps a second property elsewhere for work purposes. In these circumstances the owners can make an election (or separate elections with joint ownership) in writing to HMRC nominating which property is to be treated as their PPR for tax purposes – regardless of which is used most in practice.
This nomination has to be submitted to HMRC within two years of the second purchase but having done so the nomination can subsequently be changed as you like.
When the Telegraph exposed the MPs’ expense scandal in 2009 it was discovered that many MPs with constituencies outside London were taking advantage of this rule by flipping the CGT election between their constituency homes and their London properties. It was entirely legal but the public reaction became the main reason for the period being subsequently shortened.
It is important to appreciate that you cannot nominate a property as your PPR unless it is your home, or one of them, in the first place. If you own a property which you let out or do not live in from time to time as a home it cannot be your PPR.
However, if at some time it was your main home, either as a fact or by nomination, you will be able to claim CGT relief on a time apportioned basis based on the period it was your main home. As with all cases, the final nine months of ownership qualify for relief regardless of the property’s use as long as at some point it was your main home.
When a home is jointly owned
Where a home is jointly owned by a couple who are not married, they can make separate nominations in respect of second homes independently. However, once married they are only able to have one PPR. This is often regarded as a disincentive to marriage but these are the rules.
It is not uncommon for both spouses to have owned qualifying homes before marriage. If one or both of them retain their homes after marriage the two-year period starts again for them to nominate which is to be treated as their PPR, but on a joint basis. Nevertheless, the general rule applies that you cannot nominate a home as your PPR unless you occupy it on occasions as one of your homes. In the absence of a nomination the matter is decided on the facts, such as where you spend the most time.
If you subsequently divorce – or separate in conditions likely to become permanent – the person who remains in the matrimonial home can continue to qualify in respect of their share of the ownership. For the person leaving the property the nine-month period will apply. There are some complex rules that can operate in these circumstances which should be taken into account and can be found in the HMRC tax manuals here.
Remember that it is the duty of the owner to make a disclosure to HMRC if a property is sold in circumstances where tax is due. The period for doing so is now 60 days from completion.
Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired. His columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertake their own further research.
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