OCL: Tax and the main residence

For most of us, the house in which we live – our ‘only or main residence’ – is our most valuable asset. Often, it is one that has increased in value substantially over time.

Typically, an increase in value is subject to capital gains tax (CGT) on a sale or disposal, but there is a specific exemption for the only or main residence. This applies to a house and garden or grounds of up to half a hectare (or a larger area if this is needed for the reasonable enjoyment of the property, bearing in mind its size and character).

Some periods when a property is not occupied as the main residence may still qualify for the exemption. Examples are the last nine months of ownership, absences of up to three years in total for any reason, four years if employment requires the owner (or their spouse or civil partner) to work elsewhere in the UK, or longer if they have to work abroad.

An individual (or spouses and civil partners) may only have one main residence eligible for exemption from CGT. If they own more than one property that they use themselves (e.g., a city flat where they live during the week and a country cottage for the weekends), they can elect which is to be treated as their main residence. This election must be made within two years of the properties becoming available for their use and it can be changed from one property to another.

If the exemption applies only to a property for part of its period of ownership, any gain must be apportioned on a time basis to determine the exempt element.

Generally, there must be ‘a degree of permanence or expectation of continuity’ if a property is to be treated as the only or main residence.

If the whole property is not occupied as a main residence (e.g., because a part is used exclusively for business purposes or is let out as residential accommodation), any gain on disposal must be apportioned on a time and area basis to establish the non-exempt element.

If part of the gain relates to residential letting while the owner occupies part of the property, there is an exemption of up to the lower of £40,000 and the amount of the gain that would otherwise be exempt, are unlikely to be trading and unlikely to be making a profit.

For more information contact Tristan Wilcox-Jones, Samantha Gillham or Lucas Knight on 01225 445507.
141 Englishcombe Lane, Bath BA2 2EL