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My husband and I own two UK properties and would like to know which would be treated by HM Revenue & Customs as our main residence for tax purposes. We bought our flat first, lived in it for six years, and then let it out after we bought a house. Within two years of living there, we moved overseas, but neither of us nominated one of the two properties as our principal residence. Since moving abroad we have been UK tax resident for some years and UK tax non-resident for others, on the basis of the statutory residency ties test, and file our tax returns accordingly. Which property would, or should, be treated by the authorities as our principal residence? Can we choose which one?
Lauren Rapeport, senior associate at Withers, says the gain on your main home can be wholly or partially exempted from capital gains tax by claiming principal private residence relief (PPRR).
This operates by exempting a proportion of your gain equivalent to the time for which it was your only or main residence. Which property is your “main” residence can vary throughout your period of ownership. Spouses can only have one main residence between them.
Your flat would have been your main residence until you started occupying your house. At this point, you had two years to nominate one as your main residence. Where no choice is made, which of your properties is your main residence is decided as a question of fact (usually by reference to how much time you spend in each).
When a property is let and you are not living there, it cannot count as your main residence. It is likely therefore that for the period during which you rented out the flat, your house became your main residence.
If, when you moved abroad, you acquired a property there, you would have had a further two-year period to make an election but, without that, it is likely your foreign property would be your main residence. The PPRR conditions are more restrictive in years of non-UK residence in any event.
Accordingly, you may well find that both the house and the flat have, at times, been your main residence and will qualify for some proportion of relief. Where a property has at any time been your main residence, the final nine-month period of ownership, before selling, automatically qualifies for PPRR.
I am afraid HMRC will not confirm in advance of a sale whether a property is, or is not, your main residence, so you will need to make this assessment for yourself.
Is it fair to leave my children different sums?
I have two children, but their financial situations and life choices are quite different. I would like to leave unequal inheritances to reflect their needs — one has struggled financially, while the other is very comfortable. However, I worry that this could create tension or even legal disputes after I’m gone. Is it fair to leave different sums, and how can I ensure my decision is understood and respected?
Scott Taylor, head of private wealth disputes at law firm Moore Barlow, says you can leave different sums of money to your children, and many people do so. Our recent research shows that nearly half of Britons believe it is fair to distribute their estate unequally. But without clear communication, decisions like this can lead to confusion or resentment, and fracture family and sibling relationships. The rules differ in Scotland, where there are laws in place to prevent children or spouses from being disinherited under a will — this is known as legal rights. You can vary the amount you give to each child but you cannot exclude any spouse, civil partner, or children from receiving some of your estate on death.
Parents might make unequal provisions for different reasons, such as lifetime financial support given to one child (for example, university tuition or a house deposit), varying levels of need (such as financial situations or jobs), or just personal relationships. It might be that these kinds of decisions make sense to you, but that doesn’t mean your children understand them, especially if they expect an equal split.
Clarity and transparency are key. If you’ve used a professional to draft your will, your solicitor can document the reasoning behind your decisions. Where possible and if you have the relationships, have open discussions with your children about your plans, to help manage expectations and reduce the likelihood of any conflict between your children spilling into a legal battle.
Our next question
My children are grown up and I want to gift them their inheritance early, but I’m worried that they will be left to deal with the tax burden and other costs. Should I gift them their inheritance early?
If tensions do arise after you’ve passed, mediation can be an effective way to resolve disputes outside of court. A skilled independent mediator can help your children navigate their concerns and reach an agreement, in a way that is private and constructive.
Contrary to what might seem intuitive, fairness in inheritance is actually subjective. You can make any decision that you like. And it may be not everyone will like it. Plan carefully, seek professional advice, to ensure your wishes are respected while also helping your family understand.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com.
