Capital Gains Tax and the family home

Capital Gains Tax and the family home

Capital Gains Tax and the family home

Several important basic points

Only a property occupied as a residence can qualify for the main residence exemption (also knowns as Principal Private Residence Relief or PPR).  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 living in a property for, just two weeks is unlikely to confer the exemption on sale.

The PPR exemption does include 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 (approximately 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.

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 land is sold, then you would have to show that the part sold was needed for the reasonable enjoyment of the property.  This can clearly be difficult if you were prepared to sell it off.

If you sold your house and part of the garden and then at a later date sell the rest of the garden off, you would 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 PPR exemption on one property at a time.  In the case of a married couple (or civil partnership), there can only be one main residence per couple.  Where an individual has two (or more) residences then an election can be made to choose which residence should be the one to benefit from the PPR relief on sale.  Note that the property need not be in the UK to benefit, although there are additional restrictions since April 2015 (detailed below).  In addition foreign tax obligations may need to be considered.

The election must normally be made within two years of the change in the number of residences.

Can you claim PPR relief on your property?

Since 6 April 2015 a person’s residence is not eligible for 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.

Business use

More and more people work from home these days and working from home can affect PPR relief on sale.

Rather more helpfully the basic rule is that the exemption will only 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 may double as a spare bedroom for guests for example, in which case there is not a problem and PPR relief is still available.

Where there is exclusive business use for part of the property then part of the gain on sale will be chargeable to Capital Gains Tax.  However, it may well be that you plan to acquire a further property, also with part for business use.  In this 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

Further relief is given if your main residence has been let as residential accommodation during the period of ownership.

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.

Periods of Absence

Certain other periods of absence from your main residence may also qualify for 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 personal circumstances and length of period of absence. Please talk to us if this is relevant for you.

How we can help

The main residence exemption continues to be one of the most valuable CGT reliefs available. 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. We can help with this.

Please contact us if you have any questions arising from this article or would like specific advice relevant to your personal circumstances.

This is intended as a summary and overview of the tax situation and no action should be taken without first seeking professional advice specific to your circumstances.

Peter Warren

Tax Director