Main Residence Query

[josswallace]

To help me understand what options I have, if any, could anyone comment on the situation described below.

I have a friend who owns a large family house in Highgate purchased around 1980 (nominated as their main residence) and they also own a cottage in Norfolk which they use for week end breakes, mainly in the summer. They are looking to downsize their town house but remain in London and at the same time their Norfolk cottage is in need of updating. If they sell their house in London and buy another one can they then nominate the Norfolk property as their main residence and then sell that without paying capital gains tax.

The Norfolk cottage has never been either their main residence or only residence, so would they need to stagger the purchase of the new house in London to be long enough after the sale of the first house in London so that the Norfolk cottage had been their only/prime residebnce and if so how long would that period have to be.

[bd6759]

You friends have two residences. They have nominated the London residence as their main one. There is no tax to pay on that disposal.

They buy a new property that they intend to be a residence. Once again they have 2 residences. This time they nominate Norfolk as the main one.

When they sell Norfolk they will be entitled to residence relief - but only for the short period that it was nominated to be their main residence. The relief is time apportioned. During this period, their new London house will not be covered by residence relief.

It’s also worth stating that if the Norfolk house is repaired and enhanced solely to realise a bigger gain on its sale, that increase in value will not be covered by relief.

[josswallace]

Can I put some figures to it.......................I understand the last part..

Say they bought the Norfolk cottage for £100,000 in 1990 and sell it under the above scenario in 2020 for £300,000 and they have had it nominated as their main residence for 6 months.
The total capital gain is £200,000, what part of that gain is taxable.

[bd6759]

Time apportionment is basic arithmetic!

Let’s presume they owned it for exactly 30 years - that’s 360 months.

It was the main residence for 6 months, but the last 9 months of ownership of a residence are always exempt.

So the exempt fraction of the gain is 9/360

[josswallace]

Thanks for that I now fully understandt that scenario.

If my friends decided to sell the house in Higate, move into the cotttage in Norfolk as their only residence whilst they found a new house in London, then sold the cottage, would that be exempt from CGT or would the pro rata rules still apply.

[bd6759]

The main residence exemption applies (unsurprisingly) to periods when it is a main residence.

If there are different periods, it is apportioned. Always.

[josswallace]

So presumably the "flipping" of main residencies (outside the member of parliament expenses issue) is just about maximising the relief using the last 18 monts option.

[bd6759]

It used to be 36 months, so it was worth a bit more.

[josswallace]

Sorry...............but one more question.

From the answers you have given me I can only assume that there would no problem in them nominating the Norfolk cottage as their main rersidence, so my question is, how does this cottage which has never been their prime dwelling or only dwelling, become a residence.

[bd6759]

I don’t know. They are your friends and you said it was a residence.

If they bought it intending for it to be used as a residence for an indefinite period, it is likely to be a residence. It is all about intention. Weekdays in London, weekends in the country. Both will be residences. London might be bigger and be the factual main residence, but the law allows them to nominate which is to be treated as their main residence.