Three ways to mitigate CGT

Jeremy Passmore, partner at law firm Thomson Snell & Passmore, explains how you can alleviate your clients’ CGT bill.

With such significant increases in the price of property over the years (although perhaps not so much in the last couple of post credit crunch years) the capital gain arising on a second home is a significant item for many taxpayers.
Three aspects of the CGT legislation give valuable opportunities for mitigating the tax bill:

• The relief for the principal private residence.
• The annual exemption.
• Tax free uplift on death. 

1. Electing your main residence

Where a taxpayer has more than one residence it is possible to make an election as to which should be treated as the principal residence for the purpose of this relief. An initial election can be made within two years of acquiring the second property and can be varied thereafter.

There has to be some actual residence, so it cannot apply to a property while it is let, but there is no requirement for full-time residence. Taxpayers who divide their time between say a property in London and a property in the country can choose either to be their main residence, for any particular period of time.

When it comes to selling one of the properties, the relief will be applied to the gain in proportion to the periods for which the property has been treated as the main residence. So this gives scope for managing the situation; for example, by having more of the period of ownership covered in respect of a property which is likely to be sold first.

It can also be used to take advantage of the fact that, once the relief has applied to a property for any period, the final three years of ownership will get the relief in any event. So an election for the London flat to be the main residence for one year can bring with it a total of four years’ worth of relief.

You will lose one year’s relief on the country property, but if that is to be sold later so that there would be a longer period of ownership, losing one year’s relief as a proportion of the total period of ownership might only have modest effect.

For further advice on appropriate techniques, please apply to your local MP who may have good expertise in the area!