People’s homes are mostly free of capital gains tax but there have been some changes in the last couple of years that could catch the unwary. One has been the reduction in the period for which a homeowner qualifies for CGT relief at the end of their period of ownership, even if they have left home: down from three years to 18 months. Another is that non-residents may be subject to CGT on the sale of their UK main residence on gains arising since April 2015.
The basic rule is that a person’s main residence is exempt from CGT. If any of the following conditions do not apply, however, there could be a liability.
- The owner has lived in the property all the time they have owned it
- The property has not been let or part of it used exclusively for a business
- The grounds are less than 5,000 square metres (a little over an acre)
- The owner did not buy the property just to make a gain on it
For CGT purposes, married couples and civil partners count just one property as their main residence. If someone has more than one home at the same time, they have to nominate which is their main one.
If there is a possible CGT liability, the first step is to calculate the amount of the gain on the disposal. The sale and purchase amounts are usually used as the starting points for working out the profit. However, if the owner has been given the property, or bought it from a relative and did not pay market price, you have to use the market value of the property at the time, which can sometimes be hard to establish accurately.
In calculating the profit, certain expenses can be deducted. These include estate agents’ and solicitors’ fees for buying and selling, as well as the costs of improvements to the property, such as an extension. The cost of normal repairs and maintenance or mortgage interest cannot be deducted from the profit.
If the owner did not live in the home for a time, the profit relating to that period may be taxable. But there are some special rules that mean certain periods of absence are not subject to CGT. For example, an owner can always get an exemption for the last 18 months before they sold the property, as well as the first 12 months of ownership, if the property was being built or renovated or the owner could not sell their old home. To get the main residence relief, though, the owner must have lived in it for some of the time they owned the property. This 18-month period is extended to 36 months (the old limit that used to apply generally before 2014/15) for owners who are disabled or in long-term residential care.
The limit is four years if the owner has had to live away from home in the UK for work and there is no limit on the period if the owner has been working outside the UK. The owner must live in the property both before and after this period for it to qualify. Broadly speaking, a non-resident owner will need to spend at least 90 days a year there for the period of occupation to count.
Letting out a home may mean having to pay CGT on the property but this potential liability may be reduced or even wiped out by some special reliefs for let property.
It is important to calculate the proportion of gain on which the liability and any reliefs would be based. Take the following example: Fred makes a gain of £100,000 when he sells his home. He owned the home for 20 years, during which time he let it for 12 years (60 per cent of the time) and lived there for the remaining eight.
Of the 12 years he let the house out, 1.5 were while he was working abroad. This means they are left out of account for working out the taxable amount. The last 18 months is also not taxable. So the amount on which Fred gets private residence relief will be eight years, plus 1.5 years and 1.5 years: 11 years.
So Fred will get principal private residence relief for 11/20ths of the gain (55 per cent) and not for 9/20ths (45 per cent). The gross gain is £100,000 and 45 per cent does not qualify for the relief. So £45,000 is potentially taxable and £55,000 is, in any case, tax free.
Then there is relief for homeowners who let part of their property for some of the time (or all their property for some of the time). The maximum for this relief is £40,000 and in any case you cannot get more letting relief than private residence relief. For example, Jack makes a gain of £60,000 on selling his home. He let it out for 60 per cent of the time he owned it. He can get private residence relief for 40 per cent of the gain – £24,000 – and the remaining gain is therefore £36,000. So the limit on his letting relief is £24,000, and the tax liability is based on the remaining £12,000 (£36,000 – £24,000).
Danby Bloch is chairman at Helm Godfrey