More than one residence
It is increasingly common for people to own more than one residence. However an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple, there can only be one main residence for both. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although foreign tax implications may then need to be brought into the equation.

David has a property he lives in during the week and a country cottage where he lives at weekends. A valid election may be made for the country cottage to be exempt for CGT purposes. It does not matter that it is not the main residence.

The election must normally be made within two years of acquiring a second residence and the potential consequences of failure to elect are shown in the case study overleaf.

Furthermore the case study demonstrates the beneficial rule that allows CGT exemption for the last three years of ownership of a property that has at some time been the main residence.

Case study
Wayne, a 40% taxpayer, acquired a home in 2000 in which he lived full-time. In 2004 he bought a second home and divided his time between the two properties.

Either property may qualify for the exemption as Wayne spends time at each - ie they both count as ‘residences’.
Choosing which property should benefit is not always easy since it depends on which is the more likely to be sold and which is the more likely to show a significant gain. Some crystal ball gazing may be needed!

The choice of property needs to be made by election to the Inland Revenue within two years of acquiring the second home. Missing this time limit means that the Inland Revenue will decide on any future sale which property was, as a question of fact, the main residence.
Wayne elects for the second home to be treated as his main residence for CGT purposes. In 2010 he sells both properties realising a gain of £100,000 on the first property and £150,000 on the second property.

The gain on the second property is CGT-free because of the election.

Part of the gain on the first property is exempt. Namely that relating to:

• the four years before the second property was acquired (when the first property was the only residence) and
• the last three years of ownership which will always qualify providing the property has been the main residence at some time.

In other words out of the ten years of ownership, a total of seven qualify for the exemption. Therefore 3/10ths of the gain - ie £30,000 will be taxable. Taper relief at 40% will reduce the chargeable gain to £18,000. Assuming no other gains in the year, nearly half of this (on current figures) would be covered by the annual exemption giving a CGT liability of under £4,000. Not bad on total gains of £250,000.

Without the election, and the first property being treated as the main residence throughout, Wayne would have found the gain on the first property wholly exempt and the gain on the second property wholly chargeable. This could have resulted in a CGT liability of nearly £45,000 after taking into account taper relief at 20% and the annual exemption. Failure to make an election can be an expensive mistake.