Many people expect that if they sell the property in which they live (i.e. their home) and make a gain, it is not subject to capital gains tax (CGT) irrespective of the amount. Malcolm Finney reminds us that this isn’t always true!
CGT exemption
Technically speaking, an individual’s home is classed as their only or main residence. It may be possible for the individual (or married couple) to have more than one home. But for CGT purposes, only one of these homes can qualify as a ‘main’ residence, and in respect of which any gain on disposal is not subject to CGT (in such cases, the individual or married couple must elect (i.e. decide) which of their homes is their main residence).
What is perhaps less well known is that any gain made on a disposal (e.g. sale) may fall subject to CGT even if the property is an only or main residence.
Property intentionally acquired for resale at a profit
This will happen if an individual acquires a dwelling house wholly or partly for the purpose of disposing of it at a profit, in which case the only or main residence CGT exemption is inapplicable and any gain will fall subject to CGT. The intention at the time of purchase is critical. The relevant legislation provides:
“[an exemption from CGT is inapplicable] if the acquisition of…the dwelling-house or the part of a dwelling house was made wholly or partly for the purpose of realising a gain from the disposal of it…”
A classic example would perhaps be where an individual purchases a property with a view to developing it and then selling it at a profit. It is often believed that in such cases if the individual moves into the property for a period of time (say three to six months) that this then enables the property to qualify as the individual’s only or main residence, and thus can be sold without any CGT charge arising. This is incorrect, and in essence relies on HMRC not enquiring too closely into the matter.
‘How will they (ie HMRC) know?’ is a common cry. Any change in the legal ownership of a property is of course logged at the Land Registry, in respect of which HMRC are notified; whilst an individual may by default ‘get away’ without detection carrying out one small development, it is highly likely that a repeat development will be picked up by HMRC. It is important to appreciate that failure to disclose any CGT liability in a tax return will risk the incurrence of interest charges and possible penalties.
Property acquired and then subsequently developed
The legislation also provides:
“[an exemption from CGT] shall not apply in relation to a gain so far as attributable to any expenditure which was incurred after the beginning of the period of ownership and was incurred wholly or partly for the purpose of realising a gain from the disposal”.
Under this part of the legislation, even if the initial purpose is not to acquire the property with a view to realising a profit/gain on sale, if any subsequent expenditure is so incurred on the property, that part of the profit/gain attributable to the subsequent expenditure is not exempt. An example would be where, having purchased a property (not with a view to resale at a profit) and having lived in it for some time, a significant extension is added to the property which is then promptly put up for sale. Another common example is where at a later date expenditure is incurred on the property converting it into two self-contained flats with a view to resale of one or both at a profit/gain. In either of these two examples, that part of the gain attributable to the expenditure incurred on the extension/conversion is not exempt from CGT.
Interestingly, if planning permission is obtained with respect to the home but no work is actually carried out on the property (after the obtaining of planning permission), HMRC appear to take the view that this does not jeopardise the complete exemption from CGT on the gain on sale.
Practical Tip:
Think very carefully before purchasing a property to renovate if the clear intention is to sell it on completion and any time living in it prior to sale is limited.
