Home may not be where the heart is

Several local authorities have begun introducing penalties on second homeowners in the form of council tax charges at up to 200% the normal level, particularly in areas of the country which are popular holiday destinations.
This has led to clients who have second homes contacting us with queries about their capital gains tax nominations relating to their properties.

Capital Gains Tax (CGT)

The capital gains tax position is as follows:

  1. Where a taxpayer has two or more residences, only one of them (at any time) can be the ‘main residence’.
  2. The main residence is determined by factual criteria (where does the person spend most of their time / where do they have the strongest connections, and so on)
  3. However, the taxpayer can displace that factual assessment by giving a written notice to HMRC nominating one of the properties to be the main home for CGT purposes.

Moving on, below is the position from a council tax perspective:

  1. The entitlement of authorities to levy a council tax supplement stems from the Local Government and Finance Act 1992 and depends on whether ‘the dwelling has no resident’.
  2. A resident, for the purposes of that test, is an adult who has his sole or main residence in the dwelling. As with the default CGT position, that is a factual test.
  3. Unlike the CGT position, there is no scope for an election to displace the council tax factual assessment.
  4. This means that where a taxpayer has two or more residences and has not made a CGT nomination, it is likely that the ‘main residence’ for CGT purposes and the ‘sole or main residence’ for council tax purposes will be the same property.

However, where a taxpayer has made a nomination as to which property is their main residence for CGT purposes, it is quite possible that the nominated property is different to the property which is the ‘sole or main residence’ for the purposes of the council tax assessment.
This differing outcome for CGT and council tax purposes might be seen as giving the best of both worlds in some situations.

Furnished holiday lets

On a similar theme, some authorities (particularly in Wales) will forgive the punitive council tax charge where a property is a furnished holiday letting business.
The tests for council tax purposes stipulate a different (higher) number of days that the property must be available to let and actually let out, similar to the rules in the Income Tax (Trading and Other Income) Act 2005, which decide whether income tax treatment for furnished holiday let is possible.
In a similar way to the CGT situation, this can result in taxpayers having a property that is a furnished holiday let on their income tax return, but that is not a furnished holiday letting business for the purposes of council tax assessment.

Taxpayers often find this apparent anomaly confusing and the fact that the two sets of similar rules can have different outcomes for different purposes.

The furnished holiday let aspect may become less relevant given the announcement at the 2024 Spring Budget, which stated that the furnished holiday let treatment for income tax purposes is intended to be abolished with effect from April 2025.

The next step

Should you have any queries about CGT on your property interests, please contact Graham Boar at our Letchworth office, or your usual UHY contact.

Let's talk! Send an enquiry to your local UHY expert.