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How to Identify Your Main Residence for Capital Gains Tax Purposes

Electing your main residence for Capital Gains Tax (CGT) purposes is a tax strategy that many homeowners appear to be unaware of...unless you are an MP, that is!

Last year’s Parliamentary expenses scandal brought to light all sorts of goings on which were thought to be unacceptable for those who ought to be beyond reproach. However, the outcry about MPs changing their capital gains tax main residence election so as to shelter profits from second properties from CGT liability was a bit wide of the mark.

There is one law for all of us and this generously offers the opportunity to elect which is to be treated as our main residence for CGT purposes. Once an election has been made, it can be changed at any time afterwards to switch the exemption to another property. There is nothing wrong with changing an election, it is a statutory entitlement for everybody.

Did You Know...?
A frequent problem with main residence elections is that many people do not learn about the opportunity to elect until it is too late. Once a second property has been acquired as a residence, an election must be made between the two of them within two years. Once the deadline passes, the homeowner will be trapped with the ultimate gain on the second residence, usually a holiday home, not being eligible for any CGT exemption.

Or Will They?
 They are not quite so trapped as they might fear and may well be able to take some steps to remedy the position.

The point is to identify which of the two residences is the main residence eligible for CGT exemption if an election has not been made. Of course, it may well be within the power of the owner of the two residences to alter the facts so as to change which of the two will thereafter be treated as the main residence. This may cause some interruption to the homeowner’s normal lifestyle but that may be worth it for the CGT savings.

How Do You Determine a Main Residence?
The question is therefore: what are the tests for determining which of two residences is a person’s main residence? It is not simply a question of where does the person spend most of his or her time.

Some people may have a small flat near their work which they occupy all week and then return to a country mansion at weekends. The small flat is not likely to be regarded as the main residence.

Equally, the council tax treatment of each property (one will be treated as a second home with some council tax relief) will not be relevant unless the council allowing a discount for second home has conducted a detailed review of the claim. Very commonly it may not have done.

However, to my mind, council tax does offer the key to solving the CGT problem. The factors which the local authority will look for when identifying a main residence for council tax purposes are now well established from various council tax appeals. Essentially, the authority will look for which of the two properties the taxpayer intends to return to on a regular basis, or where he would live were it not for the demands of work or other temporary commitments.

Practical Tip
Deciding this will involve the personal and family ties applicable to each residence:

(a)   At which residence is the individual registered with a doctor or dentist?

(b)   Where are the majority of his or her possessions kept?

(c)   Where is the individual registered to vote?

(d)   Consider the membership of clubs and other social activities.

(e)   Which address is used as normal postal address?

(f)    Which property does he or she regard as the main residence and how is time split between the residences?

(g)   Where do spouse and dependants live?

(h)   From which residence do children attend school?

(i)     At which residence does the individual spend time with the family?


Clearly, therefore, it can be possible to change which of the two is actually the main residence - it may not be easy, but it can be done.

This article is from Property Tax Insider, a leading monthly UK tax magazine. Click here to slash your taxes today and get the first issue of Tax Insider for free.