Home Sweet Home – what exactly is a “Main Residence”?

Probably the second most frequently asked question on the Tax Insider website is “how do I make this property my main residence?” – the most popular is “should I use a limited company for this venture?”.

Everyone is aware that when you sell your “Only or Main Residence” (“OMR”), you are, generally speaking, exempt from capital gains tax on the gain you make so it is most important to understand what is, and is not, an OMR.

In many cases, the answer is obvious – if you only own one house and you live in it as your home then it is your OMR. This article looks at some of the more tricky situations, typically where someone has more than one residence.

If you own two properties and use both of them as a residence, then you have a choice:

You can write to the inspector of taxes within two years of acquiring the second residence and nominate which of the two will be treated as your OMR
You can do nothing, and then the question of which is your OMR will be decided based on the facts

What criteria do HMRC use to determine which is your OMR?

To quote from their Capital Gains Manual:

“The following list of criteria, although not exhaustive, may be useful.

What address is shown on declarations made on return forms.
What address is shown on third party correspondence in the file such as dividend warrant counterfoils.
If a mortgage has been used to acquire one or more residences, on which mortgage is mortgage interest relief due. (This one is no longer relevant, as the law on mortgage relief has changed)
What security of tenure did the individual have in respect of each residence.
How is each residence furnished.
If the individual is married or is in a civil partnership where does the family spend its time.
At which residence is the individual registered to vote.
Where is the individual's place of work.”

Obviously, it is better to nominate your main residence yourself as this brings with it a number of planning opportunities – see for example my article “Where do you live” in the June 2006 edition of the Tax Insider.

Making a property your OMR

If a property has been your OMR at any time during your ownership, then it is deemed to be your OMR for the last three years of your ownership of it, even if you had another OMR at that time. There is also a relief of up to £40,000 against a gain on a property that has been your OMR at any time if you have also let it as residential accommodation at another time during your ownership of it.

As a result of these reliefs, I am often asked by property investors planning to sell a buy to let property how they can make that property their OMR so that they can take advantage of these reliefs.

The other question is “how long do I have to live there?”.

They say of those magnificent yachts at the Boat Show: “If you want to know the price, you can’t afford it” and I am tempted sometimes to answer questions about OMRs with: “if you need to know how to make it your OMR, it probably isn’t your OMR”.

I have heard of property owners being advised to get the utility bills put into their names and to inform HMRC of their change of address, as if this was enough. It is not. Unless you actually live in the property and make it your home, it will not be your OMR.

If you want to move into a buy to let property so that it becomes your OMR, then you need to bear all the following in mind:

You (and your spouse or civil partner) can only have one OMR at any one time, so if you have another property you must make the nomination described above – note that if the BTL property has been let, the two year time limit for the nomination starts when the tenants leave and it becomes available for you to occupy.
You should make sure you satisfy all the criteria from HMRC’s instructions quoted above
You must actually move into the property and use it as your home – just camping out in it for a few weeks with the bare minimum of furniture is not enough.

How long must I live there?

There really is no answer to this question. Take these two examples:

Joe, who has no other properties, gets a job in Liverpool and buys a flat there. He moves in, but after he has lived there for a week he wins the jackpot on the Lottery. He lets the flat and goes on a world cruise for six months. When he returns, he buys a large detached house and moves into it. He sells the flat a couple of years later. The gain on the flat should be exempt because for that one week before he won the lottery, it was clearly his OMR and only the lottery win meant that he did not continue to live there. Because it was his OMR for that one week, the final three years of his ownership (in this case, the whole period of ownership) are exempt from CGT.
Jill, who owns a house and a flat in another part of town, lets the flat and lives in the house. She decides to sell the flat, so she evicts the tenant and moves in. She informs HMRC and her bank, etc., of her change of address. She leaves most of her furniture at the house which she lets her sister use while she is living in the ex-rented flat. She does not like the neighbourhood of the ex-rental flat and so she spends most weekends with her sister in her old house. After eighteen months of this, she sells the ex-rental flat. I suppose it is possible she will get away with this but if HMRC were to start an Enquiry into her return and find out what had actually been going on, they are very likely to argue that her occupation of the flat was a sham designed to get tax relief on it as her OMR, and deny her that relief.

These are of course two extreme examples but they illustrate the basic principle – if it really is your home – or one of your homes, in the case, say, of a weekend cottage, then it can be your OMR. If you are just living there with one eye on the calendar waiting until you can sell up and claim the relief, then it is probably not your OMR.

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Tax Tips

Problems with Profits, Dividends and Waivers?
Are you having problems with distributable profits, dividends, and waivers? There may be another way – ask your Tax Adviser about the tax treatment of loans from the company which are then written off.

Keeping Records.
Start keeping records and invoices before you start trading – most of the expenditure that you incur will be an allowable expense once you open for business.

Do you have two properties that could be your main residence?
If you have two properties that could be your main residence (such as a cottage in the country and a flat in town) it is always a good idea to nominate one of them as your main residence within two years of acquiring the second property – this will give you the flexibility to vary the nomination later.

Planning Gain Supplement (the proposed tax on increases in land values as a result of planning permission) was the dog that didn’t bark in this Budget. The consultation document was issued in December 2005 and the deadline for responses passed this February. The consultation talked of implementation in 2008 but there is no mention of it in the Budget Notes or in the 2007 Finance Bill published on 29 March. I wonder when we shall hear more about this new tax.

If you run a business (in a company or as a sole trader) and you are thinking of significant investment in plant and machinery you need to consider whether to spend the money now (50% first year allowances but only 20% writing down allowance on the balance for 2008/09), or wait until 2008/09 (100% first year allowances on the first £50,000 spent).

Are you liable to pay income tax for 2005/06 on a “Pre-owned Asset”? Did you miss the 31 January 2007 deadline for electing for IHT instead? Do you know what I am talking about? If not and if you have the use of any asset you once owned and which you gave away or sold for less than its market value then talk to your tax adviser, because the Budget announced an extension of the time limit for making such an election and it could be beneficial for you to do so.

Did you file your Self-Assessment Return Online?
Have you received a Penalty Notice from HMRC saying you filed your 2005/06 return late? Apparently a number of these have been issued in error. If you did file on time, send HMRC a copy of your IRMark electronic receipt and ask them to cancel the penalty.

Do you have a guilty conscience?
If you have not been declaring some of your income, or have underpaid tax for any other reason, contact HMRC and tell them about it before they catch you – the penalties you pay will be significantly lower if you do this, and in some cases they may be

Do you normally pay your employees on a Friday?
Good Friday this year falls on 6 April 2007, the first day of the new tax year (2007/08). If, because of the Easter Bank Holiday, you do the payroll on Thursday 5 April, then in strict law this payment will fall into the 2006/07 tax year, but by concession HMRC will allow you to operate PAYE on the payment as if it had been paid on 6 April, the first payday of 2007/08.

Tax Efficient Savings
The end of the 2006/07 tax year is approaching fast – if you have a tax-free ISA investment plan, remember that 5/4/07 is the deadline for investing your annual maximum of £7,000

Don’t Touch That Ticket!
If an employee incurs a parking fine in his company car, and the employer pays it, the fine paid will be taxable on the employee, unless:

The car is registered solely in the employer’s name, AND
The parking ticket is stuck on the car rather than being handed directly to the employee

Wedding Bells
If someone you know is getting married, remember the IHT exemption for wedding gifts - £5,000 for each parent, £2,500 for each grandparent, and £1,000 for other relatives or friends.

Be clear about the impact of VAT on growing your business turnover.
Make sure your business plan looks at how you will deal with the impact of registering for VAT. For example, if you provide services to members of the public, registering for VAT may have major implications for your pricing structure.

Consider this!
What a lot of investors fail to realise is that if you transfer ownership of a property to another party (including husband/wife), then stamp duty will be liable if the property is mortgaged and the mortgage amount being transferred is over £125,000. This is called the ‘consideration amount’.

Shame on You!
Have you sent your accountant all the information he needs to prepare your 2005/06 tax return? If not, shame on you! This is the worst month of the year for accountants, as they struggle to complete all their client’s returns in time for the 31 January deadline. I have just spoken to an accountant client of mine, who tells me that less than half his clients have provided him with the information he needs!

Offsetting Your Personal Loan
If you take out a personal loan that is used ‘wholly and exclusively’ for the purpose of the property, then the interest charged on this loan can also be offset.

Setting up A Company
A property management company can be a way to save tax for a buy to let landlord, but do not set up a company that manages your properties and just simply start paying money into it. It is important to get the commercial arrangements and the paperwork correct.

If you’re in doubt – Shout!
The golden rule is – if you’re not sure ask. HMRC would much rather be asked any number of questions than for you to make a mistake because you’re not sure what to do. It is in the interests of both HMRC and the business to get things right from the start, if you’re in doubt – shout!

Have you made losses on the stock market?
If you are one of the thousands of people who have lost money on the stock market, then consider selling your loss-making stocks/shares before you sell a property with a significant capital gain.

Are you using your £3,000 gift allowance?
Gifts totalling up to £3,000 in a tax year are ignored for IHT – and if you did not use the £3,000 in the previous tax year, it can be added to make a total of £6,000 that will never be taxable, even if you die within seven years of making the gift

Is your caravan exempt from CGT?
If you live in a caravan, then if it is mobile, it is likely to be a “chattel” and exempt from CGT. If it is “fixed” and connected to mains services, then it can qualify for relief from CGT as your main residence

Personal Tax Tip - Be very careful!
Be very careful about letting the purchaser start work on the property before completion of the sale – note the rule that your expenditure on improvements must be reflected in the state of the property at the time of completion of the sale, which it won’t be if the purchaser has knocked it down!

Business Tax Tip - Are you having problems?
Are you having problems with distributable profits, dividends, and waivers? There may be another way – ask your Tax Adviser about the tax treatment of loans from the company which are then written off.

Property Tax Tip - Do you have two properties?
If you have made a GWROB, ask a Tax Adviser what you need to do to convert it into a PET – once it has become a PET, it will be free from inheritance tax if you survive for seven years.

Personal Tax Tip - Don’t be ignorant!
Don’t ignore HMRC correspondence, and don’t bin it or feed it to the dog – that’s just asking them to open an Enquiry into your affairs!

Business Tax Tip - Keep records from the day you start!
Start keeping records and invoices before you start trading – most of the expenditure you incur will be an allowable expense once you open for business.

General Tax Tip - The same problems if you are in Scotland!
Trust Law in Scotland is different from that in England, Wales, and Northern Ireland – but the problems created by the 2006 Finance Act also affect Scottish Trusts.

Personal Tax Tip - When buying a shop like Mr Lion’s, the goodwill of the business is “adherent” goodwill – that is, it is treated as part of the value of the property itself, and cannot be transferred separately from the property.

General Tax Tip - Do you have two properties that could be your main residence? If you have two properties that could be your main residence (such as a cottage in the country and a flat in town), it is ALWAYS a good idea to nominate one of them as your main residence within two years of acquiring the second property – this will give you the flexibility to vary the nomination later, as described in the main article.

VAT Tax Tip - The days of cheap CDs and DVDs could well be numbered! There is a concession in the EU 6^th Directive that allows goods valued under £18 to be imported into the UK without any VAT. The idea behind this is to allow personal imports and mail order goods to be brought into the UK without the administrative burden of collecting the VAT from private individuals. The Revenue simply wouldn’t justify the costs of collecting it.

However, a number of large high street traders have worked out that if they supply relatively low value items, mainly CD’s, DVD’s and videos, through subsidiaries in the Channel Islands, they can undercut smaller businesses by selling those goods VAT free. This has been good for the consumer, (and explains why your last order for 4 DVD’s arrived in 4 parcels from Jersey), but bad for small businesses.

Property Tax Tip - Non- business taper relief becomes available after you have owned a property for a full three years. Try to make sure that the property is sold after a full year of ownership has been completed. For example, if you have owned a property for 7 years and 11 months, then try to delay the sale for an additional month so that you are able to claim 8 years of taper relief.

Personal Tax Tip - Do you like to gamble? Winnings on Premium Bonds are exempt from tax, and unlike other forms of gambling, you don’t lose your stake if you don’t win!

Business Tax Tip - Why not get fit, and have a company bicycle instead of a company car? There is an exemption for bicycles and cyclist’s safety equipment, provided more than half of the miles cycled are for business purposes (including travel from home to work), and bicycles are offered to all employees.

Property Tax Tip - If you offer a ‘fully furnished’ property then consider using the ‘10% wear & tear allowance’ if you are going to provide furnishings, which you do not expect to be replaced until several years later. By claiming the allowance you will receive tax relief immediately

VAT Tax Tip - It is worth pointing out that zero-rating only applies to physical printed matter, which is a supply of goods. It does not apply to the same information or document supplied electronically (i.e. e-books), as this is a supply of services, and is standard-rated.

General Tax Tip - There is no inheritance tax on a legacy to your spouse or civil partner, is there? Oh yes there is, if the surviving partner is not “domiciled” in the UK only £55,000 of the legacy is exempt, and lifetime planning will be needed to avoid IHT on the rest.

Business Tax Tip - If you pay for your employees’ business expenses, make sure you have a “dispensation” from your tax inspector. If you don’t, you have to report all the expenses you have paid for on the employees’ P11Ds and the employees then have to make a claim for tax relief.

Personal Tax Tip - Do you have more than one job, or are you an employee with a self-employed sideline? If so, don’t forget you may be able to apply for “deferment” of some of your National Insurance Contributions; better than paying too much and having to wait until the end of the tax year to claim a repayment!

General Tax Tip - Mobile phones provided for employees (and their families) are a tax-free benefit provided the phone and the rental contract are in the employer’s name – good news for family company directors with text-mad teenagers.

Business Tax Tip - Don’t be a Scrooge – office parties are tax free provided all employees who work in the office are invited, and the cost per head is less than £150 per year!

Personal Tax Tip - Made Gift Aid donations since 5 April 2005? Not filed your 2004/05 Tax Return yet? Get your tax relief now, not next year – see Box 15A.4 on the Return.

Property Tax Tip - Don’t forget - If you have made rental losses on your property income in previous tax years then you can carry them forward and offset them against future year profits!

VAT Tax Tip - Christmas tip. It is worth noting that the £50 limit for the cost of the goods supplied as business gifts is VAT exclusive and does not include any administrative costs, including post and packaging. All of these additional costs are on top of the £50.

Dividends for couples - Married couples and civil partnerships who own businesses need to make sure both their tax allowances and lower rate bands for income tax are being used – it’s bad tax planning for one to be paying higher rate tax while the other has income of less than £37,295 for 2005/06.

Make use of the 10% wear and tear allowance - The 10% wear and tear allowance is particularly suited to ‘fully furnished’ property that has been furnished immediately after acquiring it. This is because you can start to make the 10% claim immediately from the first year of letting.

Child Trust Fund Account - If you have a child born after 1 September 2002, up to £1,200 per year can be added to their tax-free Child Trust Fund account – this sum can be made up of gifts from anyone, including the parents.

Fancy a Tax-Free Gift? - Have you been running your company for 20 years or more? Why not reward yourself with a tax-free gift? Section 323 ITEPA 2003 exempts “long service awards” to employees (including directors) with over 20 years’ service. The award must not be in cash, but with an upper limit of £50 per year of service (so 20 years = £1,000), you could buy yourself a really nice gold watch!

Personal Tax Tip - Are you in a syndicate for the National Lottery, the football pools, or something similar? Make sure there is a proper written agreement in place for the treatment of any prizes won – otherwise, the payment to members of their shares can give rise to inheritance tax liabilities!

General Tax Tip - What are you up to?
When the money laundering rules came in in 2003, one of my accountant friends told me he had simply reported all his clients on the first day, on the basis that “everyone’s up to something where tax is concerned”!

Business Tax Tip - Staff entertainment.
One of the “grey areas” of staff entertainment is entertaining people who work for you but are not your employees – for example, I had a long argument with a tax inspector who wanted to disallow the cost of drinks given by a pub landlord to the draymen who delivered his beer, on the grounds that they were not his employees, but the brewery’s.

Personal Tax Tip - Lower rates of SDLT
As you can see from the table, rates of SDLT are lower in “disadvantaged areas”, and there is a facility to look these up on HMRC’s website, using the postcode of the property concerned, but beware – a solicitor told me that this is not 100% accurate, and if it says the relief is not due, it is worth double checking – the “disadvantaged areas” are defined by electoral wards, and sometimes these may have changed.

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Home Sweet Home – what exactly is a “Main Residence”?

Home Sweet Home – what exactly is a “Main Residence”?

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Kindest regards, Diana Baur

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