Capital Gains Tax and the Family Home

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1 Capital Gains Tax and the Family Home

2 Selling your home In normal circumstances, when a person sells a property they need to pay Capital Gains Tax (CGT) on any profit they make. However, Private Residence Relief means that when you sell your own home you won t have to pay any CGT, provided you meet two conditions. For the whole time you ve owned your home both the following must apply: It s been your only home or main residence You have used it as your home and nothing else You may also qualify for this relief if you sell part of the garden without selling your home at the same time. Making savings Does my home qualify? CGT relief is available only for a residence in which you have actually lived. An investment property, bought solely to rent out, would not qualify. To be considered as occupying a residence there needs to be some degree of permanence. This means that you couldn t gain the exemption by moving into the property for, say, just a couple of weeks. The term residence can include outbuildings separate from the main property, but this is a difficult area. The exemption includes land that is for occupation and enjoyment with the residence as its garden or grounds up to the permitted area. The permitted area is half a hectare, including the site of the property, which equates to about 1.25 acres. Larger gardens and grounds may qualify, but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it. This can be a difficult test. For example, in one recent court case, the owner claimed that he needed 7.5 hectares of land to enjoy his property, because he was keen on horses and riding. The courts argued that this was a subjective preference of the owner. Looking at the situation objectively, the land was not needed for the reasonable enjoyment of the property. The owner was not granted the tax exemption. Selling land separately What if you want to sell off some of your garden for someone else to build on? Will the exemption apply? In simple terms it will, provided you continue to own the property with the rest of the garden and the total original area was within the half a hectare limit. Where the total area exceeds half a hectare and some is sold, you would have to show that the part sold was needed for the reasonable enjoyment of the property. Clearly this would be a difficult case to make, since you were prepared to sell the land off in the first place. On the other hand, what if you sell your house and part of the garden, then sell the rest of the garden separately at a later date, say for development? In this case you would not benefit from the exemption on the second sale, because the land is no longer part of your main residence at the point of sale. More than one residence What if you re lucky enough to own more than one home? For CGT, you can only claim exemption on one property

3 at a time. In the case of a married couple (or civil partnership), there can only be one main residence for both. If you have two (or more) residences, you can choose which one to elect as your main residence. The property doesn t have to be in the UK to benefit, although if your holiday home is overseas you may need to think about any foreign tax you might incur. When choosing which property should gain the exemption, it s important to make the election within two years of buying the additional home. Case Study 1, below, illustrates the consequences of delaying the election. It also shows the benefit of a rule which allows CGT exemption for the last eighteen months of ownership of a property that has at some time been the main residence. Business use More and more people work from home these days. Does working from home affect the CGT exemption on sale? The basic rule is that if part of your home is used exclusively for business purposes, you will only receive a partial exemption. Of course in many cases the business use is not exclusive, for example your office doubling as a spare bedroom. In this case there is no problem. Where there is exclusive business use, part of the gain on sale will be chargeable rather than exempt. However, you may plan to buy another property, also with an area for business use. In this case, the business use element of the gain can be deferred by rolling over the gain against the cost of the new property. Residential letting A further relief is given if your main residence has been let as residential accommodation during the period of ownership. Case Study 2, below, best demonstrates the operation of this. The letting exemption can be very valuable, but it s only available on a property that has been your main residence. It s not available on a buy to let property in which you never live. Periods of absence If you have to be away from your main home, for example to go and work elsewhere in the UK or abroad, this may also qualify for CGT relief. The availability of the exemption depends on your circumstances and the length of the period of absence. If this applies to you, please discuss it with us and we will be happy to explain the situation according to your particular circumstances. Trusts The exemption is also available where a property is owned by trustees and occupied by one of the beneficiaries as their main residence. Until December 2003, it was possible to transfer a property you owned but which was not eligible for CGT relief into a trust for, say, the benefit of your adult children. Any gain could be deferred using the gift relief provisions. One of your children could then live in the property as their main residence and on sale the exemption would have covered the entire gain. HMRC decided that this technique was being used as a way to avoid CGT and so blocked the possibility of combining gift relief with the main residence exemption in these circumstances.

4 Case studies Case Study 1: Wayne Wayne, a 45% taxpayer, acquired a home in 2004 in which he lived fulltime. In 2008 he bought a second home and divided his time between the two properties. Either property may qualify for the exemption as Wayne spends time at each i.e. they both count as residences. Choosing which property should benefit is not always easy, since it depends on which is more likely to be sold and which is more likely to have increased in value. The choice of property needs to be made by election to HMRC within two years of acquiring the second home. If you miss this time limit, HMRC will decide which property to consider your main residence. Wayne elects for the second home to be treated as his main residence for CGT purposes. In 2014, he sells both properties, making a profit of 100,000 on the first property and 150,000 on the second property. The gain on the second property is CGT-free because of the election. Wayne also receives the exemption on parts of the first property: The four years before the second property was acquired (when the first property was the only residence); and The last 18 months of ownership, which will always qualify, providing the property has been the main residence at some time. In other words, only 4.5 of the 10 years Wayne has owned the first property is taxable. This amounts to 45,000 taxable gain not bad against total gains of 250,000. Had Wayne not made the election in time, his first property would have been treated as his main residence throughout the 10 years, and gains on his second property would have been wholly chargeable. Failure to make an election can be an expensive mistake. Case Study 2: Frank Frank bought a property in 1999 and lived in it as his main residence for eight years until He then bought a second property which immediately became his main residence, and the first property was let until its sale in The gain on sale of the first property amounted to 210,000. Exempt as main residence: years (actual occupation) years (last 18 months of ownership) 9.5 years Total = 9.5 years Total gain exempt 9.5/15 x 210,000 = 133,000 The balance of the gain ( 77,000) relates to the period from 2007 to The property was let during this period and had previously been Frank s main residence, so the letting exemption is available. Although the gain relating to this period amounts to 77,000, the exemption for letting is limited to a maximum of 40,000. Overall, 173,000 of Frank s gain is exempt, leaving 37,000 chargeable to tax. Since this is subject to the annual exemption, the CGT bill will be significantly less than Frank may have thought.

5 How we can help The main residence exemption is one of the most valuable CGT reliefs, but it s not always straightforward. That s why it s so important to plan ahead. We can help to spot any potential issues and maximise the available tax relief. Please contact us if you have any questions or would like advice tailored to your personal circumstances. How do I find out more? If you would like to know more about the relief, please contact either Susie Walker, Head of Tax, or Caroline Muir, Deputy Head of Tax, or one of our specialists listed below. Contact us Susie Walker Head of Tax susie.walker@jcca.co.uk Caroline Muir Deputy Head of Tax caroline.muir@jcca.co.uk Our specialists Alex Docherty alex.docherty@jcca.co.uk Peter Young peter.young@jcca.co.uk Billy Cleland Elgin billy.cleland@jcca.co.uk Nicola Horsburgh Elgin nicola.horsburgh@jcca.co.uk Gerry Quinn Glasgow gerry.quinn@jcca.co.uk John Todd Inverness john.todd@jcca.co.uk

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8 Aberdeen Elgin Forfar Fraserburgh Glasgow Huntly Inverness Inverurie Perth Stirling jcca.co.uk Disclaimer: This update has been published for information purposes only. The contents of this document are not a substitute for tax, legal or professional advice. The law may have changed since this document was first published and Disclaimer: whilst all possible While care all possible has been care taken is taken in the in completion the completion of this of document, this document, readers no should responsibility seek tax advice for loss based occasioned upon by any their person own particular acting or circumstances. refraining from action as a result of the information contained herein can be accepted by this firm. Johnston Carmichael is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member or correspondent firm or firms.