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 family home 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 18 months of ownership (36 months prior to 6 April 2014) 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 continue to benefit from a 36 month exemption.
Wayne, an additional rate taxpayer, acquired a home in 2007 in which he lived full-time. In 2011 he bought a second home and divided his time between the two properties.
- Either property may qualify for the exemption as Wayne spends time at each – ie they both count as ‘residences’.
- Choosing which property should benefit is not always easy since it depends on which is more likely to be sold and which is more likely to show a significant gain. Some crystal ball gazing may be needed!
- The choice of property needs to be made by election to HMRC within two years of acquiring the second family home. Missing this time limit means that HMRC will decide on any future sale which property was, as a question of fact, the main residence.
Wayne elects for the second family home to be treated as his main residence for CGT purposes. If in 2017 he sells both properties realizing a gain of say £100,000 on the first property and £150,000 on the second property.
The gain on the second property is CGT-free because of the election.
Part of the gain on the first property is exempt. Namely that relating to:
- the four years before the second property was acquired (when the first property was the only residence) and
- the last 18 months of ownership will qualify providing the property has been the main residence at some time.
In other words out of the ten years of ownership111, a total of five and a half years (66 months) would qualify for the exemption. Therefore 54/120ths of the gain – ie £45,000 will be taxable.
What if no elections were made?
Without the election, and the first property being treated as the main residence throughout, the gain on the first property would be wholly exempt and the gain on the second property would be wholly chargeable. Failure to make an election can be an expensive mistake.
Can you claim PPR relief on your property?
From 6 April 2015 a person’s residence will not be eligible for Principal Private Residence (PPR) relief 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.
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.
Further relief is given if your main residence has been let as residential accommodation during the period of ownership. The case study below best demonstrates the operation of this.
The letting exemption can be very valuable but is only available on a property that has been your main residence. It is not available on a ‘buy to let’ property in which you never live.
Case study CGT and family home
Frank bought a property in 2002 and lived in it as his main residence for eight years until 2010. Then he bought a second property which immediately became his main residence and the first property is then let from then until its sale in say 2017.
The gain on the sale of the first property amounted to £210,000.
Some of this gain will be exempt as it has been Frank’s main residence.
96 months (8 years actual occupation – from 2002 to 2010).
18 months (last 18 months of ownership – part way through 2016 and 2017).
So 114 months in total is exempt.
As the total period of ownership is 180 months (15 years) the exempt gain will be calculated as follows:
114/180 x £210,000 = £133,000
The balance of the gain (£77,000) relates to the period from 2010 to part way through 2016. The property was let during this period and had previously been Frank’s main residence so that the letting exemption is available. Although the gain relating to this period amounts to £77,000 the exemption for letting is limited to a maximum of £40,000.
Overall £173,000 of Frank’s gain is exempt leaving £37,000 chargeable to tax and this is subject to the annual exemption.
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 the length of the period of absence. Please talk to us if this is relevant to you. We would be delighted to set out the rules as they apply to your particular situation.
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.
How we can help
The main residence exemption continues to be one of the most valuable CGT reliefs. However, the operation of the relief is not always straightforward nor is its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief. If you live in Unit 8, First Floor, 210 Ilford Lane, Ilford IG1 2LW area we, at SMY Associates Ltd, can help with this. Please contact us if you have any questions about capital gains tax and the family home or would like specific advice relevant to your personal circumstances.