Residential property often forms a large part of an individual's overall wealth. For those who manage to accumulate more wealth, a second home is a very popular investment. All the more reason therefore to understand the tax implications, particularly capital gains tax (CGT).
Principal Private Residence (PPR)
Normally when an individual's main residence is sold no CGT is payable because of the PPR exemption. Where there is only one property owned the position is generally straightforward. However, the exemption only extends to the house and garden and grounds up to "the maximum permitted area", which is 0.5 hectares (approximately 1 acre).
If the house stands in a larger area the exemption will only be extended if the larger area is required for the "reasonable enjoyment" of the house as a residence. The type of land is also important. For example, the exemption is intended for domestic grounds and will not be given on land used for agricultural purposes. It is becoming popular to purchase additional land adjacent to the main property to ensure privacy and (perhaps) prevent development. As long as the additional land is fully integrated into the existing gardens within the permitted area, the exemption should be available. Nevertheless, you should always seek expert advice before making such a purchase or disposal.
Purchase of a second home
Significant tax planning opportunities arise where more than one home is owned. This is because an election can be made as to which of the houses is to be treated as the PPR on eventual sale. The PPR does not have to be the house which is factually the main residence, but it does have to be a residence, i.e. you have to have lived in or occupied it at some stage.
The election has to be made within two years of the acquisition of the second property and once made, can be varied. Any variation can be retrospective in that it can be for the period up to two years before the variation. The choice of which residence to elect as PPR is very important as significant tax savings can be achieved on a disposal. For example, it would not be advisable to elect for the house that is to be passed to the next generation on death as the PPR. The value on death is liable to Inheritance Tax NOT Capital Gains Tax and therefore the PPR would be wasted.
Buying to let
In general, income from letting will be chargeable to income tax. An exemption of £4,250 of gross rental income can apply to the letting of one room within your main home. For Income Tax expenses of a revenue rather than capital nature are deductible from gross rents, e.g. general decorating, maintenance and loan interest.
INTEREST RELIEF ON 100% OF THE VALUE OF THE PROPERTY WHEN FIRST LET IS AVAILABLE, EVEN WHERE ONLY PART OF THE LOAN IS USED TO PURCHASE THE PROPERTY. For example, if you let a property worth £100,000, when first let, with a mortgage of £75,000, you can take out a further loan of £25,000 and still obtain tax relief on the interest payable on the £100,000, regardless of the purpose of the additional borrowings.
Acklands Chartered Accountants are based in Bristol in the South West, however we can advise clients on capital gains tax and any other issues effecting property tax to clients across the UK.
A. Call Tim O’Keefe or Roger Harding for a free consultation to see how we can help on 0117 923 7788 Please note that phones are answered between 8.30am & 5.15pm Monday to Friday