Is it the end for Flipping to Avoid Capital Gains Tax?
It’s not just the rich who have more than one home, thousands of people have a holiday cottage somewhere (often inherited) or have bought a flat or small house to help their children, or even a little villa in the sun. Many of those with more than one home know they can nominate one of those homes to be their “main residence”, and hence free of CGT for the period covered by that nomination.
If MP’s can no longer flip their properties for their own benefit, it was only a matter of time for the rest of us!
MPs are particularly aware that taxpayers can change the main residence nomination at will, and hence “flip” a particular home in and out of the CGT relief for key periods; they do it themselves en masse!
Once the main residence relief applies a number of related CGT reliefs follow, such as relief for the last 18 months of ownership; but earlier this year the government floated a proposal to remove the ability to nominate a second home as the main residence, and hence stop the flipping game.
This was part of a package measures to impose CGT on non-residents who make gains on the disposal of residential properties in the UK. Such gains made by non-resident persons (individuals or companies) are not taxed in the UK, but may be taxed in the country where the person is resident for tax purposes.
A new charge of CGT on residential property owned by non-residents (or NRCGT) will be imposed from 6 April 2015, but only on gains that arise from 6 April 2015 onwards. The gains attributed to periods before 6 April 2015 will not be subject to NRCGT.
Taxpayers, including those subject to NRCGT, will be able to nominate a second home as their main residence for CGT purposes. But, there are some new conditions.
These conditions will affect non-resident individuals who own homes in the UK, and UK residents who own homes in other countries such as Cyprus or Spain.
The Two Changes to the Main Residence Rule
- It is located in the same country in which the taxpayer is resident for tax purposes, or
- The taxpayer spends at least 90 midnights in the property in the tax year (or 90 days spread across all the properties the person owns in the country where the property is located)
Days spent in the property by the taxpayer’s spouse or civil-partner count as being occupied by the taxpayer, but days can’t be double counted.
The 90 days of occupation doesn’t have to be a continuous period. Where the property is owned for part of the tax year, the 90-day requirement is reduced proportionately to the part of the year for which the property was owned.
Individuals who are not resident for tax purposes in the UK will have to meet this 90-day condition in order to nominate a UK home as their main residence.
90 Day Tax Rule
A word of caution however, if a non-resident individual does spend 90 midnights or more in their UK home during a tax year, that period of being in the UK could actually make them resident in the UK for tax purposes under the Statutory Residence Test, depending on a number of other factors.
This could also apply to the so-called “swallows”, who spend their summers in their UK home but the winters in their Spanish villa. So UK residents who want to nominate as their main home a property located outside the UK, where they are not tax resident, will also have to meet the 90-day requirement for that overseas property. This will over-ride any main residence nomination for that home which is already in place for periods from 6 April 2015 onwards.
People who leave the UK in winter for warmer climes, who could that possibly mean?
Expats who have retired aboard but who keep a home in the UK could be caught by the new condition B. These individuals may need to review which properties they can shelter from CGT, and thus which they want to sell.
Currently the taxpayer has to nominate a home as their main residence for CGT purposes within two years of beginning to use a second property as a home. This time-scale for nomination will continued to apply for individuals who are tax resident in the UK, but non-resident individuals will be able to nominate the property at the time they report the sale to HMRC, on a new form: NRCGT.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.