Financial planning / Tax

Capital Gains Tax – how to avoid main residence relief traps

Main Residence Relief is a valuable Capital Gains Tax allowance which saved taxpayers around £26.7 billion in 2021. But there are some pinch points which it makes sense to be aware of – so you don’t get caught out. Peter Webb, our Head of Tax Advisory, looks at how to avoid some of the tax traps.

If your property (legally referred to as “dwelling house”) has been your main residence throughout the time you’ve owned it, any gain made when you sell generally won’t attract Capital Gains Tax. However, some circumstances mean that this allowance – called Main Residence Relief – won’t apply to all of the gain that you’ve made, leaving you with a tax bill.

Are you genuinely living in the property?

Main Residence Relief unsurprisingly applies to what’s classed as your ‘residence’. Whilst there aren’t official legal definitions, you’ll need to show permanence and continuity – the things which turn simply occupying a property into residence. So, the tax authorities will not only look at your length of ownership but the quality of your occupation of the property. Whilst living there for a long period is better, being able to demonstrate that the property is genuinely your family home is key. Some of the ways you can show this is through registering to vote, listing with the local doctor’s practice, holding memberships of local clubs and producing utility bills that prove you were living there.

Are you a property trader?

A key exception to Main Residence Relief applies if you acquire a property with the aim of realising a gain on selling it. This is most likely to apply if you run a property development business where you purchase properties, live there while you renovate and sell them at a profit. In this case your profits will attract higher rates of Income Tax and Main Residence Relief won’t be available.

What’s included?

In most cases, the whole building can benefit from Main Residence Relief. But if your property has adjoining buildings such as garages or outbuildings, care is needed. Gardens and grounds which fall within a permitted area (half a hectare) are fine, and a larger area may qualify too, provided it’s needed for the ‘reasonable enjoyment’ of the property. A common pitfall is where a separate paddock is sold with the property – this might not qualify.

What if you have two homes?

If you live in more than one home, you can nominate which should be treated as your main residence. And there’s no need to choose the house you live in for most of the time. For example, if you own a property in the city which you live in during the working week and have a home in the country where you spend weekends and other times, you can nominate the country house even though it’s occupied less frequently. There’s a two-year time limit, from the date you bought the second property, for making the nomination. The trap here is that, if you don’t do it, HMRC will determine which is the main residence based on the facts – which may not give you the best outcome.

Are you working from home?

If you use any part of your home exclusively for business purposes (using a room as an office) that portion of the property won’t qualify for Main Residence Relief. However, if you use a room in your home for business and private purposes (as an office and extra bedroom) there’s no issue.

Do you own your home in a company or trust?

There can be good reasons for owning your home through a company or trust. However, as you don’t own the legal title it’s very likely relief doesn’t apply. This is a complex area of taxation and specific advice is always needed here.

What if you spend time away from home for long periods?

Some periods of absence from your main residence can count as ‘deemed occupation’ and still qualify for Main Residence Relief – even though you’re not living there. A two-year grace period applies to cover situations where, for example, there’s a delay moving in because the property is being renovated. However, when any delay lasts more than two years none of that initial period of ownership can qualify. The final nine months of ownership always count too – as long as the property has been the only or main residence at some point during your ownership. There are other periods of absence that can also count, as long as you live in the home at some stage, including:

  • Up to three years (in total) for any reason;
  • Absence due to overseas employment where all work occurs outside the UK;
  • Up to four years whilst working away if the distance from your place of work makes it unrealistic to live in the property, and your employer requires you to work away from home.

In order to benefit from these deemed periods of occupation, it’s generally necessary that you move back into main residence permanently to show you genuinely treat it as your home.

Are you letting your home?

If Main Residence Relief doesn’t apply, another allowance, called Lettings Relief, may help. After changes to the rules in 2020 Lettings Relief now only applies for periods where you live in your property with your tenants. Landlords who’ve moved out no longer qualify.

Will the gain on your property be exempt from tax in another country?

Any gain you make on selling a property which has always been your only or main residence is generally free of UK tax. But not all countries have the same rules. Boris Johnson had to pay US tax on the sale of his UK home because he’s a US citizen. In short, it’s important to understand any tax implications and reporting requirements in any other relevant country when selling property.

When is any tax due?

Since April 2020, any gains on residential property have to be reported within 60 days of completion. Any tax has to be paid in the same 60 days. It’s worth noting that generally you only have to report if tax is due.

Main Residence Relief is an incredibly valuable, but complex, tax relief. It’s important to review your circumstances and ensure you understand any pitfalls which may apply when selling your home, and what action you can take to reduce your possible tax bill.