Second Home - Tax advice for couple?

FlyingEye

We're in the very lucky position of having a home and now looking at buying a 2nd place. We (husband/wife) may end up permanently living there as the sole residence but that wouldn't happen for a while. In the meantime it would probably be a few months of 'doing up' the new place then certainly for at least a year alternating where we live every few days with no set pattern.

Question - is there any tax implication / penalty in how we 'own' the two homes in terms of whose names are on the deeds? At present, the current place is in joint names. We had thought to do the same thing on the second place. However, is there any tax benefit or perhaps potential tax benefit considering any threatened tax legislation in changing so that one of us owns one place and the other owns the other without any 'joint' names on either? There is no plan to live in them separately.

00ec25

FlyingEye wrote: »

There is no plan to live in them separately.

CGT
As soon as one or both of you becomes the owner of a second property you have 2 years in which to inform HMRC (in writing!) which of the 2 properties is now your principal private residence - this is called "the voluntary election". The PPR status controls which of the houses you will pay CGT on when you sell it

there is a possibility, but I am not qualified to advise you accurately on this and you would need to confirm it professionally, that as a couple you could conceivably each own a property in sole names but I think HMRC would not accept that you have a PPR each since you are obviously a couple and therefore the "matter of fact" rule would apply which is that the house you spend most of your time in (as a couple) is deemed to be your PPR irrespective of whose name is on the deeds. Therefore by definition the other property would be liable to CGT

I assume you know the basic mechanics of CGT incl. last 3 years rule. Post up again if not and we'll explain it once more.

Income Tax
If you end up renting the other place out then having it in 2 names would allow you to split the rental income and thus utilise your respective personal allowances to better manage any income tax liability on rent received.

Irrelevant if you do not rent it out

Inheritance Tax
Irrelevant - you can leave it to your partner free of IHT so no advantage to joint ownership

You do not mention children, but if you have any then IHT would obviously be relevant, and who owns what will impact on the value of your estate of course if you leave your bit to

Council Tax
You will get whatever your council gives as 2nd home discount rate – discretionary between 5 – 50% discount, ownership is only marginally relevant since you presumably don't care in whose name the CT bill actually is

Ian_W

You might want to read THIS HMRC guide to principal private residence relief.

I'm certainly not qualified to advise, but I can't really see on the face of it many, if any, benefits of each owning a property - whereas there may be by owning both jointly. For example, if one of them becomes liable for CGT when you sell it you each have a personal annual allowance of £10K+ to set against any taxable gain.

If you're going to nominate (as per OOec25's post) your new property as your PPR your existing property is exempt from CGT for 3yrs, if you sell within that time.

I would really suggest you seek some professional advice from an accountant before going ahead so you know what is the best course for your individual circumstances. Whilst you can get some general ideas from a forum like this we don't know all your personal details and getting it wrong could prove very costly in the future.

FlyingEye

That's extremely useful, 00ec25, thanks for your time

00ec25 wrote: »

The PPR status controls which of the houses you will pay CGT on when you sell it

Well in this case it would definitely the one we are in now so we'd just nominate that (now we know)

I assume you know the basic mechanics of CGT incl. last 3 years rule. Post up again if not and we'll explain it once more.

No, not had any reason to need CGT rules before - any info gratefully received.

Income Tax
If you end up renting the other place out then having it in 2 names would allow you to split the rental income and thus utilise your respective personal allowances to better manage any income tax liability on rent received.

Useful, but if it happened it would 95% be sure to be the one we'd declared as the principal residence though! Sounds odd, but the current place is the principal for both 'reality' and 'financial sense' reasons - BUT if it eventually came to renting one out, which is not the intention unless we had to, the current place is very 'rentable' at higher value than the new.

Inheritance Tax
You do not mention children,

No kids

Council Tax
You will get whatever your council gives as 2nd home discount rate – discretionary between 5 – 50% discount, ownership is only marginally relevant since you presumably don't care in whose name the CT bill actually is

Never knew there was such a thing, I was more worried there might be threats of extra tax for second homes. Presumably the council tax discount would have to 'align' with the declaration made for principal residence made for CGT purposes? (No, I'm not an MP or I'd already know this stuff!)

Fire_Fox

If the second house is unfurnished and unoccupied while being done up you can claim complete council tax exemption of up to six months in the first year. This only applies if the previous occupant has not claimed this discount.

00ec25

CGT basics
- only when you sell up obviously, pay 18% tax on difference between purchase price and sales price (both prices being net of costs eg. legal fees etc)
- each owner is entitled to an annual tax free amount (£10,100 for 09/10) for any gains in year (total gain includes eg. that from stocks/shares etc), hence advantage of joint ownership

3 year rule - key fact for this to apply you must have lived in the property you are selling as a main home at sometime during your ownership
scenarios:
a) sell "old" house, buy new one soon after: you have a 3 year window of opportunity after you move out of old house (in which you must have lived as your PPR) in which you can buy another whilst still owning (but trying to sell) the old house. You can sell the old house free of any CGT if sale completes within the 3 year period as the old house has 100% PPR exemption

b) continue to live in one house, sell the “other” (never having lived in it): incurs CGT on the entire gain made on “other” house

c) sell one house having, at sometime, lived in (and informed HMRC of that fact) both places - the last 3 years of the ownership of the property you are selling is exempt from CGT no matter whether you lived in it at all during those 3 years. For the remainder of the period of ownership (if >3 years) CGT liable on time apportioned basis
example - owned property for 11 years, lived in it for first 2 years then moved out to live in alternative place ever since. CGT liability period 11 years minus last 3 years minus 2 years PPR period (11-3-2)= 6 years so CGT charged at 18% x 6/11 x £net value of gain

d) sell house having both lived in it and rented it out (at alternate times) – more complex calculation as entitled to “lettings relief” - read my post here for worked example

CGT tax planning
1) By exercising the election within 2 years you can nominate whichever of the houses you think(!) is most likely to make the biggest gain or you are most likely to eventually sell. It could be the house you have moved out of and no longer live in – this is why the election is so powerful. If you miss the 2 year cutoff you lose the option to choose, it automatically becomes the house you spend most time at (put very simplistically)
2) As you appreciate, not being an MP means once having made the election you can never change (flip) it - unless you buy (or rent and live in) a 3rd property so the ball starts rolling again (before you ask, if you do this frequently you will be a trader and be subject to Income Tax not CGT)
3) PPR status has no impact on Income Tax position if you rent out a property. PPR relates only to CGT.
4) PPR status does not have to be compatible with Council Tax status if election made. CT status determined by matter of fact rule applied by council not HMRC – in their eyes which do you actually live in = primary home, other by definition = 2nd home
5) You ought to get proper advice re how to manage the election and your intention to alternate between the 2 properties in the first year or so

Extra Council Tax
entirely possible tax rules will change - councils are broke thanks to Gordon and 2nd home owners by definition are rich and should be taxed until they squeal (I should know, I’m one too )