From next April, anyone owning a second property will see their capital gains tax (CGT) relief reduced from three years down to 18 months.
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How Does CGT Relief Work?
If you only own one property and it is your main residence, capital gains tax is not something you need to worry about. But if you own two homes and the second is let to tenants, it becomes liable for tax. Capital gains tax relief was designed help owners who were struggling to sell a property and ended up renting it out for awhile. It was also popular with MPs with a London flat as well as a main family home—they used CGT relief to minimise their tax bills when one of their properties was sold.
HMRC allows property owners to designate either property as a ‘main residence’, but the key to making CGT relief work for you as a landlord is to switch the nomination from time to time—as long as you inform HMRC you are allowed to do this. If a property has been nominated as a main residence at some point previously, any profit you make in the three years before you sell is free from capital gains tax.
Tax Loophole
Many landlords have used this loophole over the years. A property can be registered as a main residence for as little as one month to quality for capital gains tax relief. However, the government is keen to close the loophole and limit the amount of tax relief landlords are able to claim. So if you want to take advantage of the maximum three years CGT, you need to secure a sale on the property before next April.