Determining your main residence
Most people know that you do not pay Capital Gains Tax when you sell your main residence because you automatically qualify for a tax relief called Private Residence Relief (PRR). However, ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country to escape to at weekends. You may well have to pay Capital Gains Tax when you sell a property that’s not your main private residence which is why determining your main residence is so important.
A married couple or civil partners who live together may only have one capital gains tax–free residence between them, although other couples who are not in a formal relationship can in some circumstances claim exemption on two properties. For example, two single people in a relationship, each owning a home that is used by the couple as a residence, will still not be liable for tax when they sell. As is often the case, the trick is in the timing. Sell one of the properties before you tie the knot and there will usually be no tax to pay. But wait until after the nuptials and you could find yourself with a rather large tax bill. If both partners own separate homes at the time of marriage or civil partnership registration, you have two years from that date to jointly determine your main residence for PRR purposes.
If you have more than one private residence, your main residence will normally depend on a combination of factors including which one you spend more time in, proximity to work and children’s school, and which address is used for bills, doctor’s registration, car registration etc. However, it is also possible to determine that matter by formally electing one of them as your main residence. To be valid the election must be submitted to HMRC and approved by them within two years of acquiring the second property (or a change in residences). The property must have been genuinely occupied as a residence at some point, and the format and timing rules for making the election are strict. Missing the deadline means HMRC will decide which property counts as your main residence, and their choice may not be the most tax-efficient for you. It is possible to change an election later, but each change must still be made within two years of the latest change in your combination of residences.
One important aspect of PRR is the final period exemption. Under the current rules, PRR automatically covers the last nine months of ownership of your main residence even if you were not living there at the time, as long as it was your main residence at some point during your ownership. This rule applies to disposals on or after 6 April 2020 and continues unchanged in 2025. However, from 6 April 2025 there is a significant change to the Capital Gains Tax rates for residential property that does not qualify for PRR. Gains falling within your basic rate band will be taxed at 18%, while gains above the basic rate band will now be taxed at 24%, reduced from the previous 28% rate. In addition, the Annual Exempt Amount – the tax-free allowance – has been reduced to £3,000 per person per tax year for 2024–25 onwards.
The principal point to remember is, if you own or occupy two or more properties, make an election to HMRC. Nobody knows what the future holds, in terms of where you will be living, what a property will be worth or when you will sell, however by making an election you give yourself options and flexibility. Remember the election can be changed at a later date. If you don’t make an election you are stuck with HMRC’s view as to which is your main residence, and this could be very costly as capital gains on property can quickly add up, especially under the new 2025 rules.