Sarah Bradford outlines the concept of a ‘main’ residence for capital gains tax purposes.
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Most people do not expect to have to pay capital gains tax (CGT) when they sell their home. Private residence relief (also known as main residence relief or principal private residence relief) normally applies in full when the property has been the taxpayer’s only or main residence throughout the whole period for which they have owned it.
Where the property has been the only or main residence for part of the period of ownership, the relief applies to the period for which it was occupied as such and the last nine months (increased to 36 months where the taxpayer is disabled or leaves the property to go into care). The relief may also apply to certain limited periods of absence, such as those where the taxpayer was required to work elsewhere.
Where the taxpayer only has one residence, the position is reasonably straightforward. However, for taxpayers with two or more main residences, it is also necessary to ascertain for any given point in time which property is their main residence. It should be noted that married couples and civil partners can only have one main residence between them, rather than one each.
Only a residence can be a main residence
Deciding which property is a main residence is only an issue where a taxpayer or married couple or civil partners have more than one residence (rather than more than one property). A property only comes into the running for the main residence for CGT purposes if it is occupied as a home; properties that are let to a tenant do not benefit from the relief. The property does not have to be occupied full-time as a home, but it must be used as a home for some of the time.
Thus, a person who has three properties all of which are occupied as a home for some of the time, will have three contenders for their ‘main’ residence.
You get to choose!
The taxpayer or married couple or civil partners get to choose their ‘main’ residence for CGT purposes by making a nomination. The ‘main’ residence does not have to be the property in which they spend the greatest amount of time; it just has to be used as a residence.
However, the ability to make a nomination is time-limited. But once made, it can be varied.
Change in the combination of residences
The ‘window’ for nominating a residence as a main residence starts from the date that the combination of residence changes. The taxpayers have two years from the date of the change in which to make the nomination. If the combination of residences changes again, the clock is reset and the taxpayer has a further two years in which to nominate a residence as a main residence.
A change in the combination of residences may occur because a new property is purchased, or an existing property starts to be used as a residence, or because one is sold or ceases to be a residence.
Example 1: Changes in circumstances
James and Julia have a family home in St Albans. They acquire a second property in the Lake District on 3 March 2024 which they use as a weekend and holiday home. The main residence relief nomination ‘clock’ starts to run from 3 March 2024, and they have two years from that date to nominate which of their residences they wish to be their main residence for CGT purposes.
On 20 July 2024, the tenant moves out of their city flat. From that date, they use it as a further home. The combination of residences changed again on 20 July 2024, and they have two years from that date to nominate which of their three residences is the main residence.
The nomination applies from the start of the period to which it relates (i.e., the date on which the combination of residences changes). It will continue to have effect until there is a change in the combination of residences, or the date on which a variation to the notice takes effect.
Example 2: New nomination
Assume the facts are as in Example 1 above.
On 20 June 2024, James and Julia nominate their St Albans home to be their main residence. This is their main residence from 3 March 2024 (i.e., the date on which the combination of residences changed, giving rise to the nomination) and 20 July 2024 (i.e., the date when the combination of residences changes).
If, in January 2025, they nominate the city flat as their main residence, this property will be their main residence from 20 July 2024 (i.e., the date the combination of residences changed) until either the combination changes again or the nomination is varied.
Need to make a nomination on marriage
When a couple marry or enter a civil partnership, they may need to nominate a property as a main residence if, after the marriage or civil partnership, they have more than one residence. However, this will not always be necessary as it depends on how the properties are owned.
As married couples and civil partners can only have one main residence between them, where a couple marry or enter a civil partnership and each had their own main residence prior to the marriage, if they retain those properties as residences, they will need to jointly nominate which is to be the main residence from the date of the marriage or civil partnership. However, if they decide to keep both properties and let one out and live in the other, a nomination will not be necessary as they will only have one ‘residence’.
It will also not be necessary to make a nomination if one partner has two or more properties (in respect of which the nomination window will run from the latest change in the combination of their residences) and the other partner does not have a residence as there will be no change in the combination of their residences when they marry or enter into a civil partnership. The previous nomination remains valid.
However, if a couple jointly owned more than one property before they married or entered into a civil partnership, although there is no change in the combination of residences on the marriage or civil partnership, following the event they can only have one main residence between them, whereas previously they could have had one each. They will need to choose which residence is the main one and make the nomination.
Which one should I choose?
The aim in making a nomination is generally to choose the one which is likely to have the largest gain over the period for which the nomination is in force, as this will save the largest amount of tax. However, there are caveats to this.
For example, where a property has at some time been an only or main residence, a final period exemption applies which shelters the gain for the final period of ownership. This is the last nine months of ownership unless the taxpayer is disabled or goes into care, in which case the final 36 months are covered. If a disposal of the ‘main’ residence is on the cards, there is no point in that property remaining the main residence in the final period of ownership; it would be more beneficial for another property to be the main residence during this period. Once the main residence is sold, a new nomination period starts as the combination of residences has changed.
The rules recognise that the taxpayer may wish to change the property nominated as the main residence and allow a variation to be made.
Varying the notice
Once a nomination has been made, it can be varied (often referred to as ‘flipping’). The variation can be backdated by up to two years from the date on which it was given. This is often done when a decision is taken to sell a property to maximise the availability of the relief across the residence portfolio.
No nomination made
Where no nomination has been made, the question as to which property is the main residence for CGT purposes will be determined by reference to the facts. While this will often be the property in which the taxpayer spends the most time, it will not necessarily be so.
Other factors are also taken into account, such as where any children go to school, where the taxpayer is based, and whether the property is used as the taxpayer’s address for tax, banking and credit card purposes, etc.
Practical tip
Taxpayers with more than one residence should determine which property is more beneficial as their ‘main’ residence for CGT purposes and make the nomination within the required window.
