That is all the more reason to make sure that you benefit in full from the best tax relief available; the principal private residence (PPR) exemption from capital gains tax.
In most sales full exemption will be automatic – but there are several important issues to keep in mind.
- The normal rule is that you are only allowed the exemption on one home at a time. However, selling homes can take time, especially this year, and you may need to buy before the sale goes through. A nine-month overlap is allowed but this may now be insufficient. If so, for tax purposes gains accrue evenly over time so even if you overshoot the nine months the gain left exposed will probably not exceed your annual CGT exemption.
- If you buy a second home, keeping both, you should submit an election to HM Revenue & Customs within two years nominating which is to be treated as your main home. This is likely to be the one on which the gain is expected to be largest, not necessarily the one in which you spend most time. Even with a less valuable holiday home the election of your main home is worthwhile because you can then change the election for a short period (perhaps a month) before reverting to the main home and benefit from the nine-month exemption on selling the holiday home later. If you own the properties with your partner, you both need to elect.
- Suppose you marry or enter a civil partnership, and both have properties that you want to keep as homes, again make an election within two years of the marriage.
- Many of us are now working from home. This will not restrict the PPR exemption if no part of the property is used exclusively for business. How about your office becoming a play area for the children at the weekend, assuming you have a strong constitution?
- When a property is let it typically ceases to be your private residence, but there are exceptions that allow full relief to continue. A period of absence is not considered where the property was your PPR both before and after this period and it does not exceed three years. You can also qualify for up to four years if you had to live away for your job. In addition, a period of any length can qualify if you or your spouse had to work outside the UK.
- If you let part of your home to a single lodger who lives with you as part of the family, there will be no restriction (CG64702).
- Letting relief is still available where you continue to live in the property with the tenants. This is particularly helpful for student landlords. It allows additional CGT relief for up to £40,000 of the gain, limited to the gain on the let proportion.
- When someone dies, they sometimes leave their property in trust for a friend or relative to live in rent free. The property can still obtain the PPR exemption, but this is not automatic, and the trustees should send a claim for the relief to HMRC within four years of the end of the first tax year concerned.
- Be careful with buy-to-let properties. There have been several cases reported where someone has claimed they lived in the property as their home for a few months, making an election in favour of this property rather than their main home to obtain nine months or more relief. Sometimes a claim is made based on separation following marital difficulties. The property can qualify but the claim must be genuine. It must become your home with a degree of permanence.
- Finally, remember we have new reporting obligations for residential property gains which require the notification to be made and the tax paid within 30 days of completion. You should do this online using a “Capital Gains Tax on UK property account”. Confusingly this seems to work independently from the self-assessment system as I discovered when filing a return last month. You will need to complete the information again with your self-assessment and the tax paid is allocated under a separate payment reference.
Written by Mike Warburton as part of the TaxHacks, this article appeared online at www.telegraph.co.uk on the 4th May 2021.