Homing in on the thorny issues of selling a second property at a substantial profit

Published on Friday 8 August 2008 22:12

QI HAVE a second home that I have been renting out. I'm now considering selling this and it is likely to produce a substantial profit. Will I have to pay tax on the entire gain? AG, Dundee

AYou describe the property as your second home, indicating that you have used it as a residence at some point. You therefore have two residences for capital gains tax (CGT) purposes, however only one of them can qualify as exempt from CGT as your main residence.

Unless you have elected for one of them to be treated as your main residence (within two years of acquiring the second house) the gain on disposal of the second home is likely to be taxable in full at 18 per cent, subject to a deduction for the annual exemption (currently 9,600) if this is not otherwise utilised.

If you have elected for the other house you own to be your main residence, then it will be possible to obtain a measure of relief on the current disposal. You could vary the election to make the second home your main residence and, one week later, submit a further variation such that your first house is again the main residence.

The way the rules operate, this will ensure that you obtain three year's worth of main residence relief in respect of the second home, for the loss of one week's relief on the first house. So, if the house had been owned for ten years, 30 per cent of the gain could potentially be eligible for exemption from CGT.

If you have already elected for the second home to be your main residence, relief will be available for the whole period of ownership, meaning the whole gain is eligible for exemption from CGT. Residence relief will not, however, be available in full in either event as the property has been let. The relief will be restricted to the lower of the maximum relief available (ie three years' worth) or the amount of the gain attributable to the let period or 40,000.

Although the calculations are not too complicated, I would suggest you seek professional advice in order to apply the rules properly.

• Andrew Addie is tax director at Grant Thornton, Scotland