Many people would naturally assume that a sale of their main home is free of capital gains tax. There are however a number of potential traps for the unwary, particularly where a property has large grounds or a number of properties are owned at the same time. Part one of our guide to main residence relief explores some of the rules to bear in mind.
Should a gain arise on the disposal of residential property, this gain will be subject to capital gains tax (“CGT”) at 18% or 28% depending on the taxpayer’s marginal income tax rate (the recently reduced CGT rates of 10% and 20% introduced in the March 2016 Budget do not apply to the disposal of residential property). The annual exemption, if available, would reduce the taxable gain and is £11,100 per individual for 2016/17.
However, upon the disposal of an individual’s only or main residence, principal private residence relief (“PPR”) may be available to exempt all or part of any gain arising. However, should a loss arise on the disposal of a main residence, which qualifies for PPR, it is not allowable for tax purposes and cannot be offset against other gains.
PPR is available on the disposal of a dwelling house which includes the main property and any relevant adjoining buildings such as garages, outhouses or separate buildings. The current legislation provides that gardens and grounds of up to half a hectare also qualify for relief, however, it may be possible for a larger area to qualify if it can be shown the land is required for the reasonable enjoyment of the property.
The property may be located in the UK or elsewhere, however with effect from 6 April 2015 a residence will only qualify if the individual and their spouse/civil partner are resident in the country where the residence is located or if not, they meet the day count test. For UK based property, residency is determined with reference to the Statutory Residence Test and the day count test means at least 90 days in a tax year is spent at the property.
More than one residence
At any one time, an individual and their spouse/civil partner may have only one residential property which they are “occupying” as their main residence for PPR relief. Where more than one residential property is owned, and both are occupied as a residence then an election may be made to nominate which of the properties is the ‘main’ residence for PPR purposes. This election must be made within two years of the date the individual first started to have more than one residence and once made it can be varied should this be required.
If an election is not correctly made then HMRC will determine the individual’s factual main residence for the purposes of PPR based on the facts and circumstances. Some examples of what HMRC will consider include which residence the individual and their family spend most of their time, which residence is used for important correspondence and the location of the registered family dentist and doctor.
Periods of absence
For PPR, occupation means both “actual occupation”, which is where the individual is physically present in the property and “deemed occupation”, which is where the individual is not physically present in the property but for the purposes of PPR they are treated as occupying the property.
The different types of deemed occupation are outlined below:
- The last 18 months – As long as the property has been occupied as the individual’s main residence at some point during the period they have owned the property, the last 18 months of ownership are treated as deemed occupation by the taxpayer.
The following deemed occupation must be preceded with and followed by a period of actual occupation:
- A period or periods of absence which collectively do not exceed 3 years;
- A period or periods of absence due to being abroad by reason of employment; or
- A period or periods of absence which collectively do not exceed 4 years by reason of employment in the UK requiring the taxpayer to work away from home
Where an individual lets out their main residence as residential accommodation during a period of absence, and this period is not treated as actual or deemed occupation, lettings relief may be available to reduce the gain arising in this period.
The relief is subject to a maximum of the lower of:
- The total amount of gain already calculated as exempt under PPR;
- The time-apportioned gain arising during the period the property was let out; or
In April 2001, Peter acquired a residential property at a cost of £275,000 which included a garage and small garden. In April 2004 Peter was sent on a 2 year assignment to Berlin. During this period Peter rented the property through an agent and returned home in April 2006. In April 2010 Peter moved in with his partner and the property was rented to third parties until it was sold in April 2016 for £500,000. PPR is applicable as detailed below:
- April 2001 to April 2004 – qualifies for PPR as actual occupation
- April 2004 to April 2006 – qualifies for PPR as deemed occupation while working overseas
- April 2006 to April 2010 – qualifies for PPR as actual occupation
- April 2010 to October 2014 – qualifies for letting relief (maximum relief of £40,000)
- October 2014 to April 2016 – qualifies as deemed occupation as last 18 months of ownership
Therefore, of the 15 year ownership period 10.5 years qualify for PPR relief through actual or deemed occupation, which on a gain of £225,000 (£500,000 less £275,000) results in £157,500 of the gain being exempt.
When considering letting relief, the exempt proportion is £157,500 and the gain relating to the rental period is £67,500. Therefore the available letting relief for PPR is limited to £40,000.
This results in a taxable gain of £27,500 (£225,000 less £157,500 less £40,000) and, on the basis Peter has already utilised his annual exemption and is a higher rate taxpayer, the capital gains tax due would be £7,700 (at 28%).
The next blog will continue the discussion on PPR and will include where there is a delay in occupying the property due to renovations, when a main residence is used for business purposes, the implications of divorce, the availability of PPR when the property is held in trust and further detail on overseas property and non-UK residents.
Whilst every effort has been made to provide information current at the date of publication, tax laws around the world change constantly. Accordingly, the material should be viewed only as a general guide and should not be relied on without consulting your local KPMG tax adviser for the specific application of a country’s tax rules to your own situation.
If you need assistance with any related matters, please do e-mail Simon at firstname.lastname@example.org.