Quarterly News

Happy Homes?

The press focus on MPs second homes earlier in the year has thrust the capital gains tax (CGT) position on the sale of homes generally into the limelight, so what does tax law actually allow?

First, to be exempt the property must not have been purchased for the sole reason of making a profit and, second, the dwelling must be an individual's only or main residence throughout the period of ownership.

The exemption is for one property per person or married couple (including a registered civil partnership) only; so if another residence is acquired an election can be made as to which property is to qualify and which is not. The election can be made within two years of a change in the number of residences available.

For example in a situation where, on marriage, each party owns his or her own property, an election can be made within two years of the marriage as to which residence is the main qualifying one. As many couples are unaware of the need for an election to be made, they miss the cut off date. In that situation HMRC and not the couple have the right to decide which property is exempt based on the facts presented.

Is it ever possible for two properties to be eligible for exemption?

The answer is potentially yes because where an owner does actually reside in more than one property for some time during the period of ownership, the last three years of ownership is generally treated as exempt as well as any period of actual occupation as a main residence. In some cases that will mean that the entire gain on both residences is exempt.

Example

Charles has owned a main residence in Leicestershire for the last eight years. Fed up with commuting he buys a flat in central London and elects for this to be his main residence. Exactly five years later he sells his home in Leicestershire. This is exempt for the first eight years as it was his main residence and for the last three years of ownership. So 11/13 of the gain will be exempt from capital gains tax. If, two years later, he sells the London flat and moves elsewhere, the whole of that gain will be exempt.

The main residence exemption can be complex and often causes a good deal of misunderstanding.

This article only deals with one aspect. There are further considerations such as:

• selling off part of the garden;
• restricting the exemption on properties with large grounds;
• using part of the property for another purpose; and
• letting out part/the whole of the property for periods during ownership.

It is strongly recommended that you contact us for further advice before carrying out transactions in property.

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