Capital Gains Tax and Your Family Home
At McDade Roberts we help individual tax needs as well as for businesses. One area we can help advise you on is capital gains tax calculations. 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. CGT exemption includes whatever the level of the capital gain is on the sale of any property that has been your main residence. Read on to find out more.
Key Points on Capital Gains Tax Exemption for Your Home
- 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. 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.
Selling Land Separately
In simple terms, the exemption will apply 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?
An individual can only benefit from CGT exemption on one property at a time. In the case of a married couple, 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. The property need not be in the UK to benefit although there are additional restrictions from April 2015. Also foreign tax implications may need to be brought into the equation so if you need advice, please just ask.
More and more people work from home these days. Does working from home affect the CGT exemption on sale? 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 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. Confused? Don't be. Just call us for a friendly chat.
A further relief is given if your main residence has been let as residential accommodation during the period of ownership up to a maximum of £40,000. 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.
The government has announced that from April 2020 an additional 'shared occupancy' rule will apply to lettings relief such that the owner of the property is required to live in the same property as the tenant.
Periods of Absence
Certain other periods of absence from your main residence may also qualify for CGT relief if for example 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.
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 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 its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief. McDade Roberts can help with this. Please contact us for a friendly chat.