'Flipping' Second Homes

“Flipping” main homes in order to avoid capital gains tax has hit the headlines significantly in the last few months. But the Capital Gains Tax (CGT) rules that apply to homes don’t just apply to MPs – they are relevant to anyone who owns or occupies more than one residential property.

It is a well established principle that your main residence is exempt from CGT. So if you buy for £2 million and sell for £3 million, your “profit” of £1 million is free of tax.

Without this exemption the gain would be taxed at 18%. Generally, you can only have one main residence at a time (and a married couple or civil partners can only have one between them).

If you own more than one property, it is usually best formally to nominate (elect) which one is to be treated (for CGT purposes) as your main residence within two years of acquiring the second one. After you have elected a property, you can switch that election between properties at any time. If you do not nominate within the two years, it is much harder to switch after that. Switching becomes most relevant when you are about to sell a property.

The useful rule which MPs have been taking advantage of (quite legitimately) is that there is an exemption for gains arising during the last three years of ownership, even if the property was not your main residence during that period. The idea of this three-year rule was originally to allow you time to sell a property if you moved but were not immediately able to sell it, but the rule does have a wider scope than this.

So take the example of Julia, who has owned her home in Oxfordshire for many years. She gets a job in London and in order to avoid a horrendous commute, buys a pied à terre in Chelsea, where she stays Monday to Thursday, returning to the country home for weekends. Shortly after buying the London flat she elects the country home as her main residence. She then sells the London flat within three years of buying it. She “flips” her election to the London flat a week before she sells it, and a week after the sale, flips it back to the country home. Because of the three year rule, Julia pays no tax on any gain following the sale of the flat. When Julia later comes to sell the country home, there would be a two week period which would not be exempt, but this would not be a major concern given how long she has owned that property.

So what is to stop you dabbling in a little property development like those misguided souls that we love to watch getting it wrong on TV? Can’t you buy a property, do it up, and sell at a profit, electing it as your main home, and repeating the pattern, whilst avoiding CGT? If only life was so simple – there is a specific rule which disallows the tax relief if you acquire the property wholly or partly for the purpose of realising a profit. It is also worth bearing in mind that main residence relief does depend on you actually occupying the property as your residence at some point in time. As such, straightforward “buy to let” properties generally won’t qualify for this CGT relief.

Although these rules are not new, it is always worth reviewing your own position if there is any change in your circumstances, such as moving in with a partner, marriage, divorce, and of course buying and selling properties. It is important to get the CGT election paperwork right, so contact your private banker for help on this. It doesn’t have to be complicated, but it could save you a lot of tax in the long run.

Ben Blair is a solicitor in the Private Client and Tax team at Boodle Hatfield. He can be reached via email: bblair@boodlehatfield.com