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Bless this exemption

Capital gains tax is pretty clear-cut when it comes to your main residence – the gain is exempt and that is it.

Or is it? Like everything else in the simplified tax regime we now live with, it is not that straightforward.

Main residence exemption

If you have used your house as your main residence for some or all of the time you have owned it, then some or all of the gain you make on selling it will be exempt.

If your main residence has a bit of land or garden attached, the gain on that can also be exempt. Up to half a hectare could be exempt but it may depend on the circumstances.

What if I have not lived in my main residence for all the time I have owned it?

It depends. If the house has been your main residence throughout your period of ownership, apart from the last three years, all the gain is still exempt. An additional benefit of this ruling means that you could rent out your house for a limited period (up to three years) after you buy somewhere else and the total gain on the first property could still be exempt.

You get these final three years added to your deemed period of main residence if at any time the property is your main residence. The fraction of gain that is exempt is:

Period of ownership as a main

residence + final three years

Total period of ownership


The gain on a property is £100,000. The property was owned for 12 years but was only the owner&#39s main residence for the first six years.

Exempt gain = 6 + 3 x £100,000 = £75,000


Chargeable gain = £25,000

Where you have bought another property but for good reasons are unable to move in, the Inland Revenue may allow you the main residence exemption on both properties for 12 or, in some circumstances, up to 24 months. A good reason might be that you are having difficulty selling your original house or the new house is not yet habitable. Who says they are not nice people?

What if, for some reason, I do not use my home as my main residence?

There is a relief called periods of absence. If the time you have not lived in a house qualifies as a period of absence, that time will be treated as though the house continued to be your main residence. There are conditions to this relief:

•You must use this property as your main residence both before and after your period of absence.

•You must not have another property that you are claiming to be your main residence during this period of absence.

If both of the above preconditions apply, the period of absence will be treated as exempt for:

•Up to three years for any reason.

•Any period of time if it is due to time spent working outside the UK.

•Up to four years if the distance from your work prevents you from living at home or your employer insists you live elsewhere.

What if I rent out a property as residential accommodation? Will any gain I make be chargeable?

Probably. But if at any time part or all of the property was or is used as your main residence, some or all of the gain will be exempt. The limit of the exemption will be the lesser of:


•The amount of the gain exempt under the main residence exemption.


Anne sells a house in August 2002, triggering a gain of £170,000. The house was bought in January 1993 and Anne used it as her main residence until March 1997. She did not reoccupy the house from that date and let it out as residential accommodation.

Gain on sale (exempt under main

residence exemption) = £170,000

4 years, 2 months + 3 years x £170,000

9 years, 7 months

86 months x £170,000 = £127,130

115 months

Net gain = £42,870

Less let property exemption of £40,000

Net chargeable gain = £2,870

The let property exemption is the lesser of £40,000 and the main residence exemption. As the main residence tax exemption here is £127,130, the let property exemption is £40,000.

What if a dependent relative uses a property belonging to me as his or her main residence? Will the gain be exempt?

Do not rely on this any more. It does not apply to any residence purchased after April 5, 1988 and only applies to one purchased before that date if various conditions are met.

What if I own more than one property? Which will be treated as my main residence?

If you use more than one house as your home, you have two years to nominate which of them is to be treated as your main residence for the purposes of main residence relief. If you do not make a nomination, the position will be judged on the facts of the case. If you buy a further property, a new two-year period for election begins. Used wisely, this can work to reduce a tax liability.


John bought a flat in Edinburgh in December 1995. He used this as his sole main residence until August 1997, when he bought a house in North Berwick. Both houses were used as his residences – the house for the family but the flat as a pied à terre when needed for overnight or weekend stays in the capital. He sold the flat in September 2002, realising a gain of £100,000. Which should he elect to be his main residence?


Total gain of £100,000 would be exempt.

House from August 1997 onwards

1 year, 8 months + 3 years x £100,000

6 years, 9 months

= 56 months x £100,000 = £69,136 exempt

81 months

Flat until September 1999 (three years before sale) and then house

3 years, 9 months + 3 years x £100,000

6 years, 9 months

= £100,000 exempt.

The last election is most favourable as you get the total gain exempt. But the house is treated as the main residence from September 1999, so you get a couple of extra years compared with the first option. You must ensure you make the appropriate election within the two-year limit.


Some clients are lucky enough to own more than one property. By providing them with guidance on the capital gains tax rules, you can help identify possible ways to minimise the tax.

However, this area of financial advice does require extremely detailed knowledge, therefore, it may occasionally be necessary to point your client in the direction of a specialist in this area.


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