Most people are aware of the exemption from capital gains tax that applies on the sale of one’s home. The exemption, known as only or main residence or principal private residence relief, applies where a person sells a `dwelling house’ which is, or which has been at any time during the period of residence his or her only or main residence. The relief extends to land enjoyed as a garden with the dwelling house, provided that this does not exceed the permitted area.
Basic Rule
As far as main residence relief is concerned, the basic rule is that exemption applies in respect of that portion of the gain that relates to a period of ownership during which the property was the owner’s only or main residence. If the property is not the only or main residence throughout the period of ownership, the gain is time apportioned and the gain attributable to periods where the property was not the only or main residence is taxable.
If the property is let at some point during the period of ownership, there will be periods where the only or main residence condition is not met. However, some relief may still be available.
Ignored Absences
Provided that the owner has no other property qualifying for relief, certain periods of absence are ignored in computing the gain. These include:
• period(s) of absence not totalling more than 3 years;
• any period of absence of any length during which the owner is employed overseas;
• any period or periods of absence not totalling more than four years during which the owner is required to live in job-related accommodation.
The owner must actually live in the property as his or her main residence after each period of absence for the absence to be ignored, unless this is not possible as a result of the owner’s employment.
Last 36 Months
The last 36 months of ownership are always treated as a period of occupation if the property has been a main residence at some point, regardless of whether the owner is actually living in the property at that time.
Letting Relief
Where a gain is made on a property that has been the owner’s only or main residence at some point and which has also been let as residential accommodation, additional relief is available. This is known as letting relief. The additional relief is the lesser of:
• £40,000 per owner (so for a couple, the limit is £80,000)
• the amount of the main residence exemption otherwise due; and
• the amount of the gain otherwise chargeable to tax
Example
Eddie purchased a house on 1 January 2002. He sold it on 31 December 2009. He lived in it as his main residence from 1 January 2002 to 30 June 2004, when he brought a new house which became his main residence. The property was let from 1 July 2004 to 30 September 2009. It was empty from 1 October 2009 to 31 December 2009.
He makes a gain on sale of £200,000.
Total period of ownership = 96 months
Period of ownership qualifying for main residence relief = 66 months (01/01/2002 to 30/06/2005 (30 months) plus last 36 months).
£
Total Gain 200,000
Less main residence relief (66/96 x £200,000) (137,500)
Gain before letting relief 62,500
Letting relief: (40,000)
Lower of:
• £40,000
• £137,500; and
• £62,500
Chargeable gain 22,500
If Eddie had not made further gains in 2009/10, the gain of £22,500 is further reduced by his annual exemption of £10,100 leaving taxable gains of £12,400 on which tax (at 18%) of £2232 would be payable.
Practical Tip
The fact that a person’s home has been let during the period of ownership does not mean all main residence relief is lost. Depending on the period of letting, it may be possible to sell the property tax-free.
Sarah Bradford
