In light of recent speculation regarding the Deputy Leader of the Labour Party’s tax affairs and whether capital gains tax (“CGT”) should have been payable on the disposal of her former home, below is an overview of the sometimes-misunderstood rules regarding an individual’s main residence. As Tribunal cases show, HMRC are challenging claims for main residence relief regularly and there are various traps into which you can fall.
Main Residence and CGT
A profit on disposal of a residential property is potentially taxable to CGT at either 18% or 24% depending on whether an individual is a basic or higher rate taxpayer. There is a relief to exempt all or part of the gain arising when an individual disposes of their main residence. In this context, residence is defined as the dwelling in which a person habitually lives, in other words, their home. Many of the challenges from HMRC which have reached Tribunal in recent years on the relief have been on the basis that the property disposed of was not in fact a residence because its occupation did not have the required degree of permanence or quality. The lifestyle of the individuals concerned, their use of the property and their intentions when acquiring it have been closely scrutinised by HMRC in these cases.
The dwelling on which the relief can be claimed includes not only to the main building but also gardens and surrounding grounds and any relevant buildings adjoining it i.e. a garage or outhouse, up to the larger of half a hectare or the area required for the reasonable enjoyment of the house (the “permitted area”).
The Periods of Occupation
For the majority of taxpayers disposing of a home they have lived in, main residence relief will exempt the full gain. However, where there is a period of absence, a gain can become partially taxable. The relief will apply in any case to the final 9-month period of ownership of a property which has been the disposers’ main residence for any part of their ownership of it. For disposals by disabled persons or those in long term care (or their spouses), unless an interest is held in another dwelling, the period is extended to the final 36 months.
In addition, there are a number of circumstances where periods of absence are classified as periods of deemed occupation on which relief can be claimed. Providing that the absence is both preceded and followed by a period of physical occupation, an absence will be treated as deemed occupation in three scenarios:
- Where the owner or owner’s spouse is abroad by reason of employment. There is no time limit on this period.
- Where the owner or owner’s spouse was absent from the property due to working elsewhere in the UK up to a maximum of four years.
- Any other period of absence up to a maximum of three years.
In the first two scenarios, if an individual’s employment prevents them from reoccupying a property prior to selling it, the absence can still be treated as deemed occupation.
Additionally, any delays in taking up residence due to redecoration or delay in disposal of an individual’s prior main residence will also not constitute an absence, providing this period does not exceed 24 months.
One Main Residence
For main residence relief purposes, an individual can only have one property which qualifies at any given time. If an individual has multiple residences, they can make a nomination to HMRC to decide which residence will be regarded as their main residence within 2 years of owning multiple residences. If a nomination is not made, the main residence will be determined by HMRC based on the facts and is usually the property most commonly used.
A key point which is often missed or misunderstood, is that where spouses are living together, they may only have one qualifying main residence between them, regardless of whether they each own separate properties. From the date of marriage or civil partnership, the couple have a two-year period to nominate the property that will qualify for main residence relief, disqualifying the other and exposing it to CGT. In this scenario, the final 9-month period will qualify as occupation as described above for both properties.
Complexities arise in respect of the rules for main residence relief where spouses separate or divorce and specialist advice should be sought.
If you have any questions about claiming main residence relief, please get in touch with your usual RG contact.
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