Cash Clinic: Windfall from second home? Yes, but you really have to live in it

Question: I own two properties, one (which I’ll call house A) where I live and another (house B) that has been let for the past decade but is currently empty. I bought house B ten years ago for £30,000 and it is now worth £230,000. My friends told me that if I move into house B for two weeks the gain I make when I sell up is consequently exempt from tax. Surely this is too good to be true. Is it?

Answer: You are right to be suspicious of this advice as it is a very common misconception. The main residence relief rules (commonly known as principal private residence relief, or PPR) work by looking at the gain arising over the whole period of ownership and exempting from tax the gain arising in the period when you are deemed to have occupied the property as your main residence.

At two weeks your actual occupation of the property as your main residence would be relatively short. However, if the property has been your main residence at any time then the last three years of ownership are deemed to be a “period of occupation” of the property.

There are a number of further periods which are deemed “periods of occupation” and on this we would recommend professional advice. In the circumstances you outline these additional rules would not be relevant.

You have a gain of £200,000 over ten years. If the last three years are deemed to be a period of occupation then the main residence relief rules would exempt £60,000 of the gain from tax.

You also mention that the property has been let throughout. There is an additional relief known commonly as PPR lettings relief, which extends the main residence relief rules.

This extension exempts from tax the gain attributable to the period of letting by time apportioning the total gain (provided the property has at some time been your main residence). This additional relief is limited to the lower of 1) the gain over the period of letting (here £200,000 as it was let throughout the whole period of ownership) or 2) the gain exempt under the main residence exemption (£60,000) or 3) the statutory limit of £40,000.

Your friends mentioned a two-week period of residence to qualify for main residence relief. But there is no minimum time on occupation here – the test is the quality of your occupation. In essence it must become your home. Examples of matters that are relevant are the address on your bank accounts and driving licence. I would suggest that you should actually live in house B for a period long enough to demonstrate that it has become your home.

By living in house B you could save tax of £28,000 (being £60,000 main residence and £40,000 lettings relief = £100,000 at 28 per cent).

• Douglas Hunter is a partner at HBJ Gateley.