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Second Homes: Gold mine or tax nightmare?

publication date: Oct 19, 2007
author/source: Mike Beattie
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When a person walks into your office and announces they are looking for a second home your first response is likely to be ‘great, that’s good, nice and straightforward’. But is it? Are there side issues that you should know about, be able to speak about, that could affect the purchase and the purchaser’s view of your service?

There is a tax ‘election’ called a Principal Private Residence (PPR) which can save second homeowners a significant sum of money.

The responsibility of the professions

Over thirty years ago, my future father in law (a solicitor) told me that there are only four professions, the Church, the Army, Medicine and the Law. If any readers hold to this maxim I apologise, but I will include (for expediency only) accountants and estate agents in my definition.

Bearing in mind my readership, I cautiously excuse members of my own profession who (where the homeowner does not have an accountant) may not be involved in the purchase or sale of a ‘second’ home until it is too late, given that there is a two year window within which a PPR election must be made. Even where a taxpayer does retain the services of an accountant, there can be no guarantee that the matter is revealed by the client until a sale is contemplated or made. But more or less every homeowner uses an agent and a lawyer at the time the purchase takes place. Is it too big a step to imagine that a homeowner faced with a tax bill that he may not be expecting will look for someone to blame?

“Why didn’t you warn me about this?” If this was you, how would you answer? Wouldn’t it make sense for lawyers and agents dealing with every residential sale as a matter of good practice to offer this simple advice:

“The purchase of this property may provide an opportunity for you to make an election under CGTA 1992 s222. You should be taking appropriate advice on this matter.”

In this article I will:
1. Explain the value of the Principal Private Residence election to second homeowners
2. Rebut the notion that it is a tax loophole
3. Review the importance of the election, given the number of second homes that there are.

PPR: A useful tax saving for second homeowners

Those fortunate enough to enjoy more than one home can save a substantial amount of tax on the sale of one of those homes if they take action on a timely basis. I refer to the Principal Private Residence (PPR) election which is often mentioned in articles on property taxes but rarely explained thoroughly enough to be useful to readers.

It is well known that the sale of one’s home is exempt from capital gains tax; less well known is the fact that any home that has, at any time, been your main residence will also be exempt from capital gains tax for the last three years of your ownership.

In the event that you own more than one home, and do not tell HM Revenue & Customs in writing which of those is the main one, HMRC will decide, based on the facts, which is exempt from CGT. Taxpayers with two or more homes should exercise their right to chose which of their homes is their main home at any time, and to vary that choice if desirable, in order that capital gains tax exemption is available in whole or in part on all of their homes.

This choice (also known as the main residence election) applies to homes overseas, to homes partly owned by others, and to some caravans and houseboats. Husbands and wives, and civil partners, can only have one home between them, and so must make joint elections. The exemption can be very valuable indeed. Suppose your client has owned a second home and sells after three years for a profit of £100,000. If he had made the PPR election he would have no CGT to pay. Without the election, a higher rate taxpayer could face a tax bill of up to £40,000 - a very significant amount.

This is no loophole

Tax saving measures are headlined so often in the general press as a ‘loophole’ that the idea has gained popular credence. In this case it may be a good headline, but it is totally untrue. The election is enshrined in law as TCGA 1992 S222. HM Revenue & Customs also publishes a guidance booklet IR283 which can be obtained from any tax office or downloaded from their website.

There are a lot of second homes out there

In an attempt to show that what follows is based more on evidence than anecdote, I am giving readers my sources of information so that they can if they wish do their own calculations. They may indeed come to different answers from mine. My expectation is that whatever the number they arrive at, it will be big.

In March 2007 Savills2 published research which estimated that there are 365,000 second homes in the UK as a whole (based on data from the Department of Communities and Local Government). In addition, estimates of the number of overseas second homes owned by UK residents are generally put at around 400,000. And the number is growing. At this point I had planned to estimate the amount of additional capital gains tax that multiple homeowners, in total, face by not making a PPR election. To do this I need to know the number of such elections that have been made. Whilst I have asked HM Revenue & Customs for this information, I do not yet have it.

So now some reasoned speculation to get to a ball-park figure:

There are approx 365,000 second homes in the UK. The average house price is £181,4603. This means that the value of second homes in the UK is approximately £66 billion. The annual price change is 8.8%4 which means that if the number of second homes remained constant, their value rose by £5.5 billion in the last twelve months. Now let us suppose that the number of second home owners who have not made a PPR election is 20% of those eligible (and I believe that generally the election is not made5) and that all those pay capital gains tax at 20%. If my maths are correct this gives an additional CGT bill of £218 million. Now double it to allow for homes overseas, and treble that for the three years that might have been exempt and the staggering total of additional CGT comes to £1.3 billion.

I accept that this is a crude estimate but it gives some idea of the size of the problem.

Mike Beattie is a Chartered Accountant and a director of Tax Savings Limited which offers second home owners a convenient and inexpensive means of making PPR elections. You can find out more about this service at

2 Savills Press Release dated 19 March 2007
3 Land Registry House Price Index dated 29 August 2007
4 Land Registry House Price Index dated 29 August 2007