Capital Gains Tax and the Family Home
At McDade Roberts we can help with all aspects of tax planning. 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. Below we look at the operation of the relief and consider factors that may cause it to be restricted.
Several Important 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.
'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.
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.
More Than One Residence
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 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 PPR Relief on Your Property?
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.
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.
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 is only available on a property that has been your main residence.
From April 2020 an additional 'shared occupancy' rule applies to lettings relief such that the owner of the property is required to live in the same property as the tenant.
How McDade Roberts 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. Advance planning can help enormously in identifying potential issues and maximising the available relief. McDade Roberts can help with this. Please contact us if you have any questions or would like specific advice relevant to your personal circumstances.