Capital gains tax on 2 properties

[Rainey]

I own a property with my girlfriend in joint names up in the Midlands, which we have on the market. In January of this year we bought a property in Devon to move into, again in joint names.
So far we have been unable to sell the house in the Midlands, but when we do, will we have to pay capital gains tax as a second property?
I have hear of principal private residence but do not understand, could someone please give me some guidance.

Thanks, Mark

[Lambs]

I don't think that you will, but the answer to your question is not necessarily straight forward. Firstly, let's consider Principal Private Residence (Relief), or PPR. One's home is normally a capital asset, and as with most capital assets, falls within the ambit of Capital Gains Tax, (CGT), rather than Income Tax. i.e., if you sell a capital asset, then you are potentiall subject to CGT. That's obvious, and so is the fact that the Inland Revenue don't normally charge you to CGT when you sell your home. Obviously, this is a good thing, otherwise people would find it very expensive to move house. What most people do without realising, is to rely on the PPR exemption, which allows someone to sell their only, or main, residence without a charge to CGT. Most people only have the one home, so the PPR is a given. However, the Revenue acknowledges that one can possess more than one home at once, and allow people to make an election, to determine which is the one that should be subject to the PPR rules. Before moving on to more complex areas in PPR, 'though, I think that it's fair to make a time-saving assumption, and that is that you have bought the house in Devon to move into on a permanent basis, (i.e. to take up RESIDENCE there), and with the intention of selling your former Midlands home. If this is the case, then you shouldn't need to worry about CGT on either property. As mentioned above, the Revenue does allow that people can and do possess more than one property at a time; they also allow that some people will purchase a second home and move into it, whilst trying to sell their first home. They allow the first home to be unoccupied for up to THREE YEARS prior to sale, and it will still be wholly exempt under the PPR rules. (Strictly, provided the property has at some time been occupied as one's PPR, then it will be deemed to have been occupied throughout the last 36 months prior to its sale, regardless of actual physical occupation). Effectively, you have 3 years to sell your former home, and no CGT will arise. As long as you think that you'll be able to sell it within the next couple of years, bearing in mind the trigger point was Jan. '04, then you should be OK. The way that PPR and CGT interact means that even if you were to sell it, say 6 months after the three-year time limit, only a relatively small amount of the total net gain would become chargeable: it's not an "all or nothing" charge in that respect.

You may formally elect for the Devon property to be your PPR, but unless you have been flitting from one property to the other, then there's little point in so doing. (Unless you see your Devon home as being one which you might also vacate soon as well).

I should add that if you have ever let your first property in the Midlands, or you have used it for business purposes, then the matter becomes more complex. There's also potentiall an issue if the land on which the property stands is substantial, or not in keeping with the peropty itself. Also, if the Revenue thinks that you only ever bought the first property in order to make a gain, then they might try to disallow PPR. However, for most people these restrictions are unlikely.

I recommend that you read the Inland Revenue's Self Assessment Help Sheet IR 183:

http://www.inlandrevenue.gov.uk/helpsheets/ir283.pdf

which I think will be of use to you.

Based on the above, I don't think that you will have any problems. If you have any further queries, just append them to this.

Good Luck!