Shifting private residence relief to maximise tax saving

Tax on your main residence

You don’t usually pay tax when you sell your main residence for more than you paid for it because of private residence relief (PRR). In effect this exempts any profit you make from capital gains tax. The flip side of the coin is that if you sell your main residence and make a loss, you can’t claim tax relief for it. However, there are circumstances where you can use the tax rules to your advantage to do just that.

Two homes

If you have two or more homes, you can make an election to nominate which one qualifies for PRR. If you don’t, HMRC will decide broadly based on which property you use as your home the most. Surprisingly, the tax legislation allows you to pick which of your homes gets the PRR irrespective of which property you actually use as your main home. You do of course need to be occupying the second home as a residence for some of the time, e.g. a holiday let that you use for two weeks per year won’t qualify.

Making the right choice

The general planning strategy is to nominate the property for PRR that you expect to increase in value the most or which has the lowest potential loss as your main residence.

Example. Judy and Richard own a flat near the coast that they use at weekends and over the summer. It is currently worth around £5,000 less than they paid for it. Their main home in Leeds is currently worth £50,000 less than when they bought it. Judy and Richard should make a joint election to nominate the flat as their main residence to maximise the losses that can be claimed on the property in Leeds. Once claimed, the capital loss reduces the capital gains you make from the sale or transfer of any asset.

Once a nomination for a property is made it can be varied as many times as you wish. The nomination can be backdated for up to two years. That means if Judy and Richard from our example notice a shift in property values which makes their original choice less efficient for PRR purposes, they can change their minds and notify HMRC.

Timing

The first elections must be made within two years of a change in the “combination of residences”, otherwise the opportunity passes. If you have two or more homes that can qualify for PRR, it’s sensible to make an election within the two-year period even if the facts clearly indicate relief will apply to the property you wish it to. This allows you make an election to shift the main residence later if circumstances change. This prevents the two-year window being lost, as once made the election can be varied.

An election should be made whenever you have two or more properties that can qualify as your home. By electing each to be your main residence, even for a very short period, the final nine months of gain always qualify for PRR.