Reader Question:
I'm married and live in the UK. We have a second home in Switzerland. We stay there about 10 weeks a year, and for another 10 weeks per year we let the property out as a holiday home. The 2nd property was built and bought in 2005. At the time we did not make a PPR (Principal Private Residence) election . In the next few years we are thinking we might dispose of the Swiss property - is it too late to make a PPR election to mitigate CGT?
My response:
For the benefit of other readers, ordinarily if you were to sell a property (even overseas) any profit which you make is liable to Capital Gains Tax or CGT (currently at a rate of 18% for basic rate income tax payers - and 28% for higher rate income tax payers). However, you do not pay capital gains tax on the sale of your principal residence i.e. where you live – this is known as Private Residence Relief.
If you did then every time you moved home you’d be landed with a huge tax bill. Obviously, if you only own one house and live in it then this is your principal residence. But if someone has a second home or an investment property they can actually choose which is their principal residence and notify HMRC accordingly - which must be done within 2 years of switching residency. You have to actually live in your nominated principal residence to qualify for Private Residence Relief otherwise the tax man will be after you.
There are a string of rules laid out in this factsheet from HMRC. But for you:
- As you bought the property in Switzerland more than two years ago any PPR nomination can not be backdated to the purchase date of property.
- You could nominate the Swiss property as your primary residence now and as such the last 36 months of ownership would be free from UK capital gains tax.
- Also as you rented the property out you may be entitled to lettings relief on part of the gain (see the HMRC factsheet)
- Finally don't forget to use your respective annual Capital Gains Tax allowances if the property is jointly owned.
I hope that helps.
Damien
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Damien – many thanks for the above answer. Very helpful, and now I think I know what to do to look into this further. I have one further question – although you mention that I could elect the swiss property as my PPR now, is that really possible?
You can elect an overseas property as your primary residence, but depends on the circumstances of course. The key point is that you have to live in the place that you elect to be your primary residence and a nomination can only be backdated in certain circumstances which I mention (and are covered in detail in the HMRC factsheet)
Best Wishes