Your home is your castle, or is it?
It is well known that if you make a capital gain when you sell a property that has been your ‘only or main residence’ throughout your period of ownership, the whole of the gain will be exempt from capital gains tax. However, this may not always be the case.
Main residence relief applies to exempt a capital gain from capital gains tax where that gain arises on the disposal of a residential property that has been occupied by a taxpayer as their main residence.
However, there are certain conditions and restrictions to the main residence exemption, particularly where the property comprises more than one building or enjoys extensive gardens and grounds.
Where do you live?
At any one time you can only have one ‘main residence’, and if you are a married couple or a civil partnership you can only have one ‘main residence’ between you.
However, a person can have more than one residence, for example a house in one part of the country and a flat in London. Which one is to be considered the ‘main residence’ will be based on the facts, which could leave the property with the largest gain exposed to capital gains tax.
An election can be made to choose which residence is to benefit from the exemption. Before an election can be made, the nominated property must be used by the taxpayer as their residence. This rule prevents a property which has never been used as a taxpayer’s residence from benefiting from the main residence relief.
There is the option to vary the nomination at any time and the variation can be retrospective for up to two years.
There is a tight deadline for making the main residence election, after which the opportunity may be lost.
If a property has been a taxpayer’s main residence at some point during their period of ownership but has also been let, some or all of the capital gain may still be exempt.
Taxpayers with multiple residences should review their position on a regular basis. With careful planning and consideration of appropriate elections within the required time limits, one can ensure the main residence relief is put to best use.
Granny lives here!
Can a ‘main residence’ comprise more than one building?
Yes it can, but only in the right circumstances. Properties with the benefit of a granny annexe require careful consideration. Regardless of whether granny or another family member lives there or whether the annexe is rented out it may be possible – in the right circumstances – to claim exemption from capital gains tax on some or all of the apportioned gain arising on the granny annexe.
How does your garden grow?
The main residence relief exemption extends to the garden and grounds of the property, however there are several potential pitfalls.
If the garden or grounds falls within the ‘permitted area’, up to half a hectare, including the site of the house, they will automatically be exempt. However, if your garden or grounds exceed half a hectare you will need to show that the larger area is ‘required for the reasonable enjoyment’ of the property having regard to the size and nature of the house. This test is objective and not based on one’s own personal requirements. The use to which the garden and grounds has been put will also affect the availability of main residence relief.
If you are selling your house and your garden or part of it to different purchasers, the timing of each sale can have a significant impact on the availability of main residence relief. The test is whether the gardens or grounds form part of your main residence at the time the house is sold. If the house is sold first, then the test will not be satisfied on the subsequent sale of the garden.
Obtaining professional advice in advance of a sale of the whole or part of a residence or on the purchase of a second home is key to maximising the main residence exemption and minimising or eliminating a potential capital gains tax bill.
To find out more about capital gains and general tax management, contact senior associate Vikki Logan on 01892 506027, email firstname.lastname@example.org.