Capital gains tax and the family home

The cap­i­tal gains tax (CGT) exemp­tion for gains made on the sale of your home is one of the most valu­able reliefs from which many peo­ple ben­e­fit dur­ing their life­time. The relief is well known: CGT exemp­tion what­ev­er the lev­el of the cap­i­tal gain on the sale of any prop­er­ty that has been your main res­i­dence. In this fact­sheet we look at the oper­a­tion of the relief and con­sid­er fac­tors that may cause it to be restrict­ed.

Several important basic points

Only a prop­er­ty occu­pied as a res­i­dence can qual­i­fy for the exemp­tion. An invest­ment prop­er­ty in which you have nev­er lived would not qual­i­fy.

The term ‘res­i­dence’ can include out­build­ings sep­a­rate from the main prop­er­ty, but this is a dif­fi­cult area. Please talk to us if this is like­ly to be rel­e­vant to you.

‘Occu­py­ing’ as a res­i­dence requires a degree of per­ma­nence so that liv­ing in a prop­er­ty for say, just two weeks with a view to ben­e­fit­ing from the exemp­tion is unlike­ly to work.

The exemp­tion includes land that is for ‘occu­pa­tion and enjoy­ment with the res­i­dence as its gar­den or grounds up to the per­mit­ted area’. The per­mit­ted area is half a hectare includ­ing the site of the prop­er­ty which equates to about 1.25 acres in old mon­ey! Larg­er gar­dens and grounds may qual­i­fy but only if they are appro­pri­ate to the size and char­ac­ter of the prop­er­ty and are required for the rea­son­able enjoy­ment of it. This can be a dif­fi­cult test. In a court case the exemp­tion was not giv­en on land of 7.5 hectares attached to a prop­er­ty. The own­er said he need­ed that land to enjoy the prop­er­ty because he was keen on hors­es and rid­ing. The courts decid­ed that the own­er’s sub­jec­tive lik­ing for hors­es was irrel­e­vant and, apply­ing an objec­tive test, the land was not need­ed for the rea­son­able enjoy­ment of the prop­er­ty.

Selling land separately

What if you want to sell off some of your gar­den for some­one else to build on? Will the exemp­tion apply? In sim­ple terms it will if you con­tin­ue to own the prop­er­ty with the rest of the gar­den and the total orig­i­nal area was with­in the half a hectare lim­it.

Where the total area exceeds half a hectare and some is sold then you would have to show that the part sold was need­ed for the rea­son­able enjoy­ment of the prop­er­ty and this can clear­ly be dif­fi­cult if you were pre­pared to sell it off.

What if on the oth­er hand you sell your house and part of the gar­den and then at a lat­er date sell the rest of the gar­den off sep­a­rate­ly, say for devel­op­ment? Then you will not get the ben­e­fit of the exemp­tion on the sec­ond sale because the land is no longer part of your main res­i­dence at the point of sale.

More than one residence

It is increas­ing­ly com­mon for peo­ple to own more than one res­i­dence. How­ev­er an indi­vid­ual can only ben­e­fit from the CGT exemp­tion on one prop­er­ty at a time. In the case of a mar­ried cou­ple (or civ­il part­ner­ship), there can only be one main res­i­dence for both. Where an indi­vid­ual has two (or more) res­i­dences then an elec­tion can be made to choose which should be the one to ben­e­fit from the CGT exemp­tion on sale. Note that the prop­er­ty need not be in the UK to ben­e­fit although there are addi­tion­al restric­tions from April 2015 detailed below. Also for­eign tax impli­ca­tions may need to be brought into the equa­tion.

The elec­tion must nor­mal­ly be made with­in two years of the change in the num­ber of res­i­dences and the poten­tial con­se­quences of fail­ure to elect are shown in the case study that fol­lows.

Fur­ther­more the case study demon­strates the ben­e­fi­cial rule that allows CGT exemp­tion for the last nine months of own­er­ship of a prop­er­ty that has at some time been the main res­i­dence. Where the own­er of the prop­er­ty is in long term care or a dis­abled per­son, and meets the nec­es­sary con­di­tions, they ben­e­fit from a CGT exemp­tion for the last 36 months of own­er­ship.

Can you claim PRR relief on your property?

A person’s res­i­dence may not be eli­gi­ble for Pri­vate Res­i­dence relief (PRR) for a tax year unless either:

• the per­son mak­ing the dis­pos­al was res­i­dent in the same coun­try as the prop­er­ty for that tax year; or
• the per­son spent at least 90 mid­nights in that prop­er­ty.

The rules apply to both a UK res­i­dent dis­pos­ing of a res­i­dence in anoth­er coun­try and a non-res­i­dent dis­pos­ing of a UK res­i­dence.

New reporting and payment requirement

It is impor­tant to note that from 6 April 2020 those liable to CGT on a res­i­den­tial prop­er­ty dis­pos­al must send a new stand­alone online return to HMRC and make a pay­ment on account of the tax due with­in 60 days of com­ple­tion of the sale. These require­ments do not apply if the gains are cov­ered by PRR.

Business use

More and more peo­ple work from home these days. Does work­ing from home affect the CGT exemp­tion on sale? The answer is sim­ple — it may do!

Rather more help­ful­ly the basic rule is that the exemp­tion will be denied to the extent that part of your home is used exclu­sive­ly for busi­ness pur­pos­es. In many cas­es of course the busi­ness use is not exclu­sive, your office dou­bling as a spare bed­room for guests for exam­ple, in which case there is not a prob­lem.

Where there is exclu­sive busi­ness use then part of the gain on sale will be charge­able rather than exempt. How­ev­er, it may well be that you plan to acquire a fur­ther prop­er­ty, also with part for busi­ness use, in which case the busi­ness use ele­ment of the gain can be deferred by ‘rolling over’ the gain against the cost of the new prop­er­ty.

Residential letting

Pri­or to 6 April 2020 let­ting relief gave up to £40,000 (£80,000 for a cou­ple who joint­ly own the prop­er­ty) to some­one let­ting part or all of a prop­er­ty which was their main res­i­dence or was their for­mer main res­i­dence at some point in their peri­od of own­er­ship. How­ev­er under the revised rules let­ting relief is only avail­able where the own­er and ten­ant share occu­pan­cy through­out the peri­od of the let.

Periods of absence

Cer­tain oth­er peri­ods of absence from your main res­i­dence may also qual­i­fy for CGT relief if say you have to leave your prop­er­ty to go and work else­where in the UK or abroad. The avail­abil­i­ty of the exemp­tion depends on your cir­cum­stances and length of peri­od of absence. Please talk to us if this is rel­e­vant for you. We would be delight­ed to set out the rules as they apply to your par­tic­u­lar sit­u­a­tion.

Trusts

The exemp­tion is also avail­able where a prop­er­ty is owned by trustees and occu­pied by one of the ben­e­fi­cia­ries as their main res­i­dence.

Until Decem­ber 2003 it was pos­si­ble to trans­fer a prop­er­ty you owned but which was not eli­gi­ble for CGT main res­i­dence relief into a trust for say the ben­e­fit of your adult chil­dren. Any gain could be deferred using the gift relief pro­vi­sions. One of your chil­dren could then live in the prop­er­ty as their main res­i­dence and on sale the exemp­tion would have cov­ered the entire gain.

HMRC decid­ed that this tech­nique was being used as a mech­a­nism to avoid CGT and so blocked the pos­si­bil­i­ty of com­bin­ing gift relief with the main res­i­dence exemp­tion in these cir­cum­stances.