At first sight, this may seem something of a straightforward question. If you have more than one home, logic would suggest that this is the property at which you spend the majority of your time. However, as far as the main residence exemption for capital gains tax (CGT) purposes is concerned, this is not necessarily the case.

This article covers CGT and second homes. For other tax tips and information see Lawpack’s Tax Answers at a Glance and 101 Ways to Pay Less Tax bestselling books.

Nature of the exemption

Most people are aware that there is no CGT to pay on any profit that they make if they sell their home. More specifically, the exemption applies where the property in question is the person’s only or main home and it has been used as their home and as nothing else.

Example 1

Lucy buys a flat for £250,000. She sells it five years later for £280,000. It has been her only home throughout the five-year period of ownership.

The conditions for main residence relief are met. Lucy does not have to pay any CGT on the profit she makes from selling her house.

More than one property

If a person has more than one home, they can choose which one is their main residence for CGT purposes. Once a choice is made, they can change it at any time. Of course, there are some conditions that need to be met, but this ability to choose which property is the main residence for tax purposes is a useful planning tool in minimising the CGT liability that may ultimately be payable on the sale of their homes.

To be considered as a main residence for tax purposes, the property must be a dwelling house, or an interest in a dwelling house which is, or which at some point during the period of ownership been, the individual’s only or main residence.  For these purposes a dwelling house is a property commonly lived in as a dwelling, such as a house or a flat.

Example 2

Bella has a flat in London which she lives in for two years. Her job relocates to Cheshire and she buys a cottage in Cheshire, which she lives in most of the time. She decides to keep her London flat and enjoys regular weekends in London.

Both properties qualify to be treated as her main residence and Bella can choose which one is her main residence for tax purposes. Although following her job move to Cheshire she spends most her time in the Cheshire property she can retain the London flat as her main residence for tax purposes if this is more beneficial.

Nominating a property

Where an individual has more than one property that qualifies as the main residence for the purposes of the CGT exemption, the individual has the facility of choosing which property they want to be treated as their main residence for CGT purposes.

A nomination must be made within two years from the date on which the combination of residences changes. In a simple case where a person acquires a second home, a property must be nominated as the main residence within two years of the date on which the second property is acquired.

Example 3

John has a house in Liverpool, which he has owned since 2010. He buys a cottage in the Lake District which he uses as a second home on 31 March 2020. John has until 31 March 2022 to nominate a property as his main residence for CGT purposes.

The clock starts to run on a new nomination period every time a property is either added into the mix or a property ceases to be used as a residence. In each case, a new nomination should be made within two years of the date of the change. This is illustrated by the following example.

Example 4

Luigi has a flat in Milton Keynes which he purchased in 2016 and which he lived in as his main home. On 1 May 2019, he purchased a second property in London, which he lives in during the week. He has until 1 May 2021 to nominate a property as his main residence for CGT purposes. In January 2021, he nominates the London flat as his main residence. The nomination takes effect from 1 May 2019, the date on which the second property was acquired.

On 10 July 2021, he acquires a cottage in Cornwall as an additional residence. He has until 10 July 2023 to nominate a main residence for CGT purposes. In December 2021, he decides to sell the Milton Keynes’ flat. A new nomination period begins as the portfolio of residences has changed and he has until December 2023 to make a new nomination.

Changing your mind

Once a property has been nominated as a main residence the nomination is not ‘set in stone’ and an individual can ‘flip’ properties to make maximum use of the exemption.

Once a nomination is made it stays in place until the earlier of the date on which the combination of residences changes or from the date of a variation of the original notice.

This means that a person can change the property that is the main residence for CGT purposes after a nomination has been made. A notice of variation applies from the date that is specified in the notice and the effective date can be up to two years before the giving of the notice. This provides a lot of flexibility to chop and change which property is the main residence. As the last 36 months of ownership of a property that has at some point been an only or main residence is exempt from CGT, a notice of variation may be made when a sale is imminent to benefit from the final period exemption.

Example 5

Hayley has a flat in Birmingham, which is her nominated main residence, and a second property in Devon. She decides to sell the Birmingham flat. To take advantage of the final period of ownership exemption she makes notice varying her main residence to the Devon property. To gain maximum benefit from the final period exemption the variation is backdated two years.

No nomination

In the event that a person has more than one home and has not made a nomination as to which one is the main residence for CGT purposes, the one that counts as the main residence will be determined as a matter of fact. Although this will often be the property where the individual spends most of his time, it will not necessarily be the case. For example, where someone works away during the week spending weekdays in a city flat, the main residence may be the family home elsewhere.

Married couples and civil partners

Married couples or members of a civil partnership are only allowed one main residence for tax purposes between them. However, when a couple marries or enters into a civil partnership and each has a property, they have two years from the date of marriage to nominate which property is their joint main residence for CGT purposes.

Let property

A property that is let out cannot be a nominated main residence. However, where, for example, a property has been a main residence before being let, letting relief may be available to reduce the gain. The final period exemption will also be available.

Practical tip:

Getting the nominated main residence right can save a lot of tax. Professional advice should be sought.