Is my wife’s second property taxable?

My wife and I are in the process of buying a home (I am a first-time buyer) and I am concerned about the capital gains tax (CGT) implications of jointly purchasing the property, as my wife already part owns another flat which she acquired before we were married. As a married couple, I understand we can only claim principal private residence (PPR) relief for one property, and that if we dispose of a property not covered by this relief, we will have to pay CGT at the new 18 per cent rate. But isn’t there also a rule that, as long as we sell the second property within three years of getting married, any gain will be exempt from CGT? However, as the flat that my wife part owns is occupied by her brother, there is unlikely to be an opportunity to realise her share until she remortgages in autumn 2012 – which would be beyond this three-year window. Could we avoid having to pay CGT on the flat by moving into it at some stage and making it our PPR for tax purposes? Alternatively, would there be any benefit in setting up a corporate vehicle to acquire the new property so that we can pay corporation tax rather than CGT?

David Kilshaw, head of private client advisory at KPMG, the accountants, says this is a common problem: a couple get married and want to set up home together but already own one or more properties.

You should not be concerned about CGT on the family home you are buying and should eventually be able to sell it tax-free. In addition, there is a good chance you can avoid any large tax bill in respect of your wife’s flat.

There should be no CGT on the eventual sale of your new home as this would be covered by PPR relief. But you are right that a husband and wife can only have one such relief between them.

The extent to which the flat will be subject to CGT when it is sold will depend on whether your wife ever lived in it as her main residence. If she did, it will be exempt from CGT both for the time that she occupied it and for the last three years of ownership prior to when it is sold.

Also, if her brother is paying rent, then any part of the gain in this period could be sheltered from tax by so-called “letting relief” which is worth up to £40,000 off any CGT bill.

Your wife also has an annual CGT allowance allowing her to realise, currently, £10,100 of gains tax-free. So the remaining taxable gain after these reliefs may be quite small.

If your wife never lived in the flat, one option is to do so now as a couple and elect it to be your main home, so benefiting from the “flipping” rule that many MPs took advantage of.

You have two years from the date you buy your new house in which to make this election. Flipping gives you the last three years of growth tax-free – even if you live in the flat for a much shorter period. There is no minimum period you need to live there, as long as it becomes your “home” for a time.

Finally, don’t buy the new home through a company. The PPR relief would then be lost and the tax rate on sale would be 28 per cent, instead of 18 per cent. In addition, there would be further tax charges when the proceeds are extracted from the company. Owning private homes in a company structure is normally a recipe for disaster.