CGT on homes: Get the details right
The capital gains tax relief on disposal of the taxpayer’s principle private residence (PRR) is the most valuable personal tax relief costing the exchequer £26.7bn per year. Reshma Johar provides an overview of the rules.
When a client disposes of a residential property, the starting place for most tax advisers is to create a timeline of the period of ownership and to understand the nature of occupation and use of the property. As part of the initial conversations the tax adviser will need to obtain an understanding of other linked buildings, garden and grounds which also need to be considered for CGT purposes. The nature of these enquiries will be to establish what periods of ownership could benefit from the available reliefs.
From 6 April 2020, individual UK residents need to report disposals of UK residential property to HMRC within 30 days of completion as well as settle any tax due at that time.
There are exceptions to this, a report is not required where there is no charge to CGT, for example; the entire gain is covered by PRR, or the gain is within the annual exempt amount, or the transfer is between a spouse or civil partner.
Non-UK resident individuals have been required to report under the non-residence CGT (NRCGT) regime for disposals from 6 April 2015, but now they must report using the same mechanism as UK residents.
Advisers need to work fast to collate and analyse information relating to a property disposal including the historical use. In addition to the 30-day notification of the disposal, an entry may be required on the self-assessment tax return where the disposal proceeds exceed £48,000 and the disposal of the main residence is not entirely covered by PRR.
What is principle private residence relief?
The relief ensures that any gains or losses arising from the disposal of an individual’s main residence are kept outside of CGT. A residence would be the place where the individual would normally live, as a home with a degree of permanence and continuity. I will not explore the definition of a dwelling for the purposes of this relief.
The PRR is available to cover periods of actual occupation and deemed occupation, where the relief is available by treating the individual as living at the property. From 6 April 2020 the final period exemption (being actual occupation or deemed occupation) reduced from 18 months to 9 months. The final 36 months exemption period remains in place for property owners who are either disabled or resident in a care-home.
What counts as deemed occupation?
Only certain types of periods of absence count as deemed occupation. The following circumstances of deemed occupation need to be sandwiched between periods of actual occupation both before and after:
- Any period where the owner is abroad by reason of his employment.
- Up to four years in single period or not, where the owner is required to work as part their self-employment business or employment and required to live elsewhere.
- Up to three years, which does not need to be consecutive, for any reason.
The period of absence counts as deemed occupation where the individual is living with a spouse or civil partner who meets one of the necessary conditions relating to work or employment. A spouse or civil partner can only have one main residence between them.
Delays in taking up residence
There can be situations whereby there is delay in taking up occupation of a main residence, for example due to renovations.
Before 6 April 2020 under an extra statutory concession relief was given under PRR for periods of absence before occupation, provided it did not exceed one year, which could be extended to two years if the delay is outside the individual’s control. From 6 April 2020, this extra statutory concession is written into TCGA 1992, s 223ZA allowing up to two years of relief before occupation, if all the conditions are met.
Further relief can be provided in addition to PRR, where the main residence is wholly or partly let as residential accommodation.
For disposals on or after 6 April 2020 lettings relief is only be available to individuals who share occupation of their residence with a tenant. This means that lettings relief will not be available where the owner moves out of the property.
Lettings relief for each owner is the lower of:
- PRR amount.
- Gain arising during the let period.
A starting point for most tax advisers is to establish:
- Intention of property purchase
- Floor space of property, buildings, grounds and gardens
- Date of purchase
- Purchase price
- Date of sale
- Sales proceeds
- Capital improvements
- Enhancement costs
- Periods of actual occupation
- Periods of absence and reasons
- Periods property was let, any rent-a-room or commercial letting
- Details of any other property used as a residence
- Details of any nomination or election as the principle residence
- Ownership history for example, joint, inherited
With such a valuable relief, claims will be scrutinised by HMRC to ensure the relief is available where the property has been the only or main residence of an individual. When looking at the relief, advisers will need to consider the individuals facts and circumstances.
Over the years there have numerous tax cases disputing claims of PRR and areas of dispute have included:
- intention of occupation;
- degree of continuity;
- whether a property was occupied as a residence; and
- the nature and quality of the occupation.
The rules for relief on the disposal of a main residence by a non-resident individual are different and have not been covered in this article.
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.