Tax traps to watch when selling your main home
Capital gains tax on the sale of a home can be complex when main residence relief comes into play. Lisa Spearman, private client partner at Mercer & Hole, explains the key tax compliance issues to consider to avoid an unexpected tax bill
21 Jun 2019
Main residence relief applies to ‘a dwelling’ so issues can arise if buildings are combined or divided, such as two flats occupied as one or a house subdivided. The type and location of outbuildings can be significant.
The land associated with the dwelling is exempt up to the permitted area. This is half a hectare or such area ‘as required for… reasonable enjoyment… having regard to the size and character of the dwelling’. The amount of the permitted area and its value is often negotiated with HMRC. The tax return should fully disclose all the circumstances and the appropriate evidence should be retained in the event of an HMRC enquiry.
If selling part of the land for development, the garden should be sold first and then the house to maximise relief.
To qualify for relief the occupation of the dwelling must amount to a residence. This is something more than a hotel room or temporary accommodation: it needs to be what is commonly understood as a ‘home’.
No relief is available if there is no occupation as a home, but the test is qualitative rather than quantitative, and a permanent residence can be established in a short time.
Property election for relief
Where more than one property could qualify for relief, you can elect which should be exempted. Only one property can be relieved at a time and one only per married couple.
The deadline for the election is two years from the date on which the choice arose. If the deadline is missed no election can be made until there is a change in circumstances such as the acquisition of an additional property. In this case the matter is decided as a matter of fact following a claim on a tax return.
Once an election has been made it can be varied at any point so that it has effect from a date up to two years prior to the variation.
If the dwelling is partly used for a non-residential purpose such as running a business, some exemption might be lost. Letting a property can be a business for this purpose. Lettings relief is available to exempt a gain of up to a maximum of usually £40,000. From 6 April 2020 it is expected the relief will apply only where the owner is in co-occupation with the tenant.
The whole ownership period needs review to establish the exempt proportion. Certain periods are deemed exempt even though there is no occupation at that time. However, care is needed with off plan purchases as relief may be denied if the building work takes longer than 12 months. Where the dwelling has been a main residence the final period of ownership is automatically exempt. The duration of the final period is currently 18 months but is to be reduced to 9 months after 6 April 2020.
While transfers between spouses usually take place tax free there can be unexpected outcomes on a later sale of the house. Trustees and executors may claim main residence relief in certain limited circumstances.
Non-residents disposing of UK residential property must report the disposal within 30 days. Any tax due can be payable at that time but main residence relief may be limited so it is worth getting the information ready to be able to meet the deadline.
About the author
Lisa Spearman, private client partner at Mercer & Hole