Many people who own more than one home do not realise that they hold a valuable statutory right, and that failing to exercise it in time can quietly cost them thousands of pounds in tax. The right in question is the ability to tell HM Revenue and Customs which of your properties is your main residence for the purposes of private residence relief. If you do not use it, HMRC will decide the question for you, on the facts, and their conclusion may not be the one you would have chosen.
This article explains the point, sets out the primary legislation behind it, and describes the practical consequences of getting it wrong.
What private residence relief does.
When you sell a property that has been your only or main residence, the gain arising is relieved from capital gains tax. The relief is given by section 222(1) of the Taxation of Chargeable Gains Act 1992, which applies relief on the disposal of a dwelling-house, or part of a dwelling-house, which is or has at any time in the period of ownership been the individual’s only or main residence.
The words “only or main” are the heart of the matter. Where you have only one residence, there is nothing to decide. Where you have two or more, a question arises as to which of them is your main residence, and that question determines where the relief attaches.
The right to nominate.
The law does not leave you at the mercy of a factual investigation. It gives you a right to choose. Section 222(5)(a) of the 1992 Act provides that, so far as it is necessary to determine which of two or more residences is an individual’s main residence for any period, the individual may conclude that question by notice to an officer of the Board given within two years from the beginning of that period, subject to a right to vary that notice by a further notice as respects any period beginning not earlier than two years before the giving of the further notice.
Two features of this provision deserve emphasis.
First, the choice is yours to make, and it does not have to reflect where you actually spend most of your time. A nomination does not necessarily have to mirror the reality of the situation. You may nominate whichever qualifying residence you prefer, and there is nothing improper in choosing the property that produces the better tax result.
Second, there is a strict time limit. On the interpretation established in Griffin v Craig-Harvey (1994) 66 TC 396, the notice must be given within two years of acquiring the second residence, or of a relevant change in the combination of residences you hold. The clock starts running, and it does not wait for you to become aware of the opportunity.
What happens if you do nothing.
This is where the risk crystallises. If you do not make a valid nomination within the time limit, and no late nomination is available to you, the identity of your main residence is determined not by your wishes but by the facts of your situation.
HMRC apply a range of factual indicators when reaching that conclusion. Drawing on their published guidance at CG 64545, these include where a married individual’s family spends its time, where any children go to school, where the individual is registered to vote, the location of the place of work, how each residence is furnished, which address is used for correspondence with banks, credit card providers and HMRC, where the individual is registered with a doctor and dentist, where the car is registered and insured, and which address is the main residence for council tax.
The property that answers most of these questions is likely to be treated as the main residence. The difficulty is obvious. Once the nomination window has closed, this factual outcome is beyond your control, and HMRC’s view of which property is your main residence may differ from your own commercial preference. If the relief lands on the property you did not intend to shelter, you may find yourself facing a capital gains tax charge on the very property you had hoped to protect.
The power of a valid nomination.
The reward for acting in time is certainty. Since the introduction of self-assessment in 1996, when the former section 222(5)(b) was repealed, a valid notice given within the time limits is conclusive in favour of the residence nominated. There is no scope for HMRC to challenge it, save where there is a genuine doubt as to whether the dwelling-house in question has actually been occupied as a residence.
This conclusive effect has been borne out in practice. Where a valid election was in place and HMRC accepted that the property had been used as a residence, the tribunal held that HMRC could not go behind the election. A timely, valid nomination therefore puts the matter beyond argument.
An essential precondition: the property must be a residence.
The right to nominate only arises where you have two or more dwelling-houses that are each actually occupied as a residence. A property that you own but do not occupy as a residence does not count, and cannot be nominated.
This has a particular consequence for occupation under a mere licence. Since 16 October 1994, HMRC do not accept that a property occupied under a licence is a residence, as explained in their guidance at CG 64536. Where you have only one true residence, there is simply nothing to nominate, and no election can be made.
If you have missed the deadline.
Missing the two-year deadline is not always fatal. A late nomination may be available under section 222(5A) of the 1992 Act where, throughout the period in which you have had two or more residences, you have held an interest of no more than negligible market value in all but one of them, and you have not previously given a nomination notice. A late nomination made on this basis takes effect from the date on which you first had more than one residence.
Examples of a residence of negligible capital value include a rented flat, or accommodation provided by an employer that does not meet the job-related accommodation test. The provision is narrowly drawn, however, and is unlikely to help where the second residence is held under a longer arrangement, such as an assured shorthold tenancy, that could command more than a negligible value on the open market.
A note for married couples and civil partners.
Special rules apply to couples. Under section 222(6)(a) of the 1992 Act, an individual living with a spouse or civil partner can have only one main residence between them for as long as they are living together. Where a nomination notice affects both parties, it must be given by both. A single nomination signed by both spouses or civil partners is therefore required where the election affects each of them.
The practical takeaway.
If you own more than one home, do not assume that HMRC will treat the property you regard as your main home as your main residence for tax purposes. The safest course is to make a written nomination under section 222(5)(a) as soon as you acquire a second residence, and in any event within the two-year window. A nomination costs nothing to make, it can be varied later as your circumstances change, and it replaces uncertainty with a conclusive record of your choice.
The alternative is to leave the question to a factual investigation whose outcome you cannot control, at the very moment a property is sold and a tax charge falls due. For a right that is so straightforward to exercise, that is a risk well worth avoiding.
This article is provided for general information only and does not constitute tax advice. The rules governing private residence relief are detailed and fact-sensitive, and specific advice should be sought before acting.