Sarah Bradford highlights some planning opportunities and pitfalls surrounding the capital gains tax main residence exemption.
The main (or private) residence exemption is perhaps one of the better-known capital gains tax (CGT) exemptions. Where the exemption applies, no CGT is payable where a gain is made on the sale of the taxpayer’s main residence.
However, there are conditions that must be met for the exemption to apply, and traps that may catch the unwary.
Nature of the exemption
The main residence exemption provides relief from CGT on the disposal of a taxpayer’s only or main residence. For any gain to be fully exempt, the taxpayer must have occupied the property as their only or main residence for the whole time they have owned it (less the last nine months).
Where a property has been the taxpayer’s only or main residence for some but not all of the ownership period, the gain is time-apportioned and the exemption applies to the period occupied as the only or main residence and the final nine months of ownership.
Relief is only available for a property occupied as a residence; it does not apply for any period or to any part that is let (subject to any available lettings relief) or used for business purposes.
Final period exemption
Where a property has been the taxpayer’s only or main residence at some point, the final nine months of ownership are covered by the main residence exemption, even if the taxpayer has another main residence at that point. This can be useful if a taxpayer completes on the purchase of a new home before completing on the sale of the old home.
The final period exemption is increased to 36 months where the taxpayer or their partner is disabled or a long-term resident in a care home and they do not have another property that is a main residence.
Spouses and civil partners
Married couples and civil partners can only have one main residence between them. Consequently, if a couple has two properties they occupy as a home, they need to elect which one is their main residence for tax purposes – it is not possible for them each to have their own main residence for CGT purposes.
Where a married couple or civil partners separate, if one partner moves out and the property is sold within nine months of them leaving, both parties will benefit from main residence relief on the sale. A special relief applies where one partner transfers their share of the marital home as part of a financial settlement to the other partner and this takes place more than nine months after the partner has moved out. This has the effect of preserving main residence relief on the disposal as long as the departing partner does not have another property that has become their main residence.
Remember, married couples and civil partners cannot each have their own main residence for CGT purposes – they are only allowed one between them, even if they each own a residence in sole name.
Land and gardens
The main residence exemption extends to land and gardens up to the permitted area that the taxpayer occupies and enjoys with the residence. The permitted area is set at 0.5 of a hectare by the legislation. However, a larger area may qualify for relief where this is required for the reasonable enjoyment of the property, having regard to its size and character. For example, land of more than 0.5 of a hectare surrounding a large country house and used as gardens may qualify for the main residence exemption, while a field adjacent to a terraced cottage is unlikely to do so.
A further problem may arise if the land is physically separated from the property (e.g., across a road). Land and gardens will normally only qualify if they surround the property and are enclosed with it. The fact that the taxpayer owns the land and the property is not enough in itself. HMRC is generally resistant to the argument that land that is physically separate from the property is part of the residence. However, where there is a long history of a garden being conveyed with the property and used as a garden despite being physically separate from it, a claim for main residence relief in respect of the land may be accepted.
Land and gardens can only qualify for main residence relief where they are enjoyed with the residence. Where some of the land is to be sold separately, the order of sale is important. If land that has been enjoyed with the property is sold while the property remains a main residence, relief should be forthcoming. However, if the property is sold and some of the land is retained, and this land is then sold later, any gain on the land relating to the period since the sale of the house (apart from the last nine months) will not qualify for relief.
It may be possible for land in excess of 0.5 of a hectare enjoyed with the main residence to qualify for main residence relief if this is necessary for the reasonable enjoyment of the property. On the other hand, main residence relief may not be available for land that is not used with the property as a garden, or which is sold separately after the property is sold.
Business use
Main residence relief does not apply to any part that is used exclusively for business. Where this is the case, the gain must be apportioned (for example, by floor area or number of rooms) and the part relating to the business use of the property will be within the charge to CGT. However, if the annual exempt amount is available, this may be sufficient to shelter any chargeable gain that arises if the area used for business is small (e.g., one room).
Avoid using an area exclusively for business to prevent loss of the main residence exemption. For example, a room used as an office during the day to run a business from home could be used for homework in the evening. Main residence relief will not apply to any part of the property that is used exclusively for business use.
More than one home
Where a taxpayer or married couples or civil partners have more than one home (e.g., a city flat and a country cottage they live in at weekends), they will need to choose which property is to be their main residence for tax purposes. They can do this by making a main residence election, within two years of the date on which the combination of residences changes (e.g., the completion date of the second home). The two-year election period starts to run each time the mix of residence changes.
Once made, a nomination remains in place until the combination of residences changes or the election is varied. Where a variation is made, this may be made with retrospective effect from any date up to two years prior to the date on which the notice of variation is given.
In the absence of an election, it will be a question of fact which residence is the main residence. If a landlord has more than one residence, the main residence election should be kept under review to ensure that it is used effectively to shelter the larger gain and flip where beneficial.
Let properties
Letting relief is now only available in limited circumstances where the taxpayer occupies the property at the same time as the tenant. This may shelter some or all the gain pertaining to the let part.
However, main residence relief is not available for a property that has been let throughout, even if the taxpayer does not have another property qualifying for the relief.
Practical tip
It is dangerous to assume that because you live in a property as your home, any gain on sale will escape CGT. Main residence relief may be lost for various reasons; make sure that you know what they are.
