Capital Gains Tax on Homes

If you sell most types of investments (including property) for more than you paid for them, there may be capital gains tax to pay. But if you sell your only or main home, there is normally no capital gains tax. This exemption is known as private residence relief.

If you own more than one home, only one of them qualifies for private residence relief. And you may lose the relief if you use the home for business, leave it for prolonged periods or let it out. If you do have to pay capital gains tax on selling a home, it can mean a hefty tax bill – the gain, after deducting allowable expenses and your annual allowance, is taxed at 18 per cent. Major changes to capital gains tax since 6 April 2008 mean there is no longer any relief for gains due to inflation.

Qualification rules for Private Residence Relief

Private residence relief is given for your only or main home, whether it is a house or flat, freehold or leasehold, and wherever in the world it is.

You must occupy the home exclusively as your residence if it is to be free of capital gains tax. If part of the home is used exclusively for business, you may have to pay tax on part of the gain. And letting out some or all of your home can also mean a capital gains tax bill.

If you live in a caravan or houseboat, there’s normally no capital gains tax to pay on it, even if it is not your only or main home. Caravans and boats count as wasting assets with a useful life of 50 years or less – and are thus outside the net for capital gains tax. But if you own the land on which a caravan stands, you might have to pay capital gains tax if you sell it, unless the caravan was your only or main home.

Gains on a former home that continues to be occupied by your ex-spouse are tax-free if you sell within three years of your leaving. A longer exemption period applies if this is your ex-spouse’s only or main home and you have not nominated any other property as your own only or main home.

A home in which a dependent relative lives rent-free is also free of capital gains tax provided it fell into this category on or before 5 April 1988. This exemption lasts only as long as the relative continues to live in the home. Dependent relatives are: your mother or the mother of your spouse or civil partner if she is widowed, separated or divorced; any relative of yours or your spouse or civil partner who is unable to look after themselves because of permanent illness, disablement or old age (usually 65 or over).

Gardens

Private residence relief extends to the garden that goes with your home provided either the area of your home and garden come to no more than half a hectare (about 1¼ acres) or, if larger, a garden of that size is required for the reasonable enjoyment of the home. Gains related to any extra land will usually be taxable.

If your plot is no more than half a hectare, you can sell part of it without having to pay any capital gains tax even if you have obtained planning permission to build on the land. But the relief is lost if you fence off or start to develop the land and then sell it.

If your plot exceeds half a hectare and you sell part of it, the Revenue will usually argue this is strong evidence that the garden was larger than required for reasonable enjoyment, so a gain will be taxable. Exceptions may be where you sell to a family member or where the sale was forced on you by financial necessity.

Private residence relief does not apply to a garden if you have already sold (or given away) the home that went with it.

If you have more than one home

You can choose which home which is your main one and so free of capital gains tax. It doesn’t have to be the home where you spend most time.

You must make the election in writing and within two years of acquiring a second or further home. Once made, you can vary the election whenever you like and as often as you like and any variation can be backdated up to two years.

The Revenue takes the view that, if you miss the two-year deadline, you have lost the opportunity to make any election at all. Your main home will then be determined by the facts, such as your postal address and where you are registered to vote and you can be required to provide evidence to support this.

Married couples and civil partners can have only one main home even if in reality they spend a lot of time living in separate homes (for example, because one works away during the week). Unmarried and unregistered couples can each have a different main home.

Working from home

If any part of your home is used exclusively for business, there may be a capital gains tax bill when you sell the home. This will not usually apply if you are an employee working from home, but could do if a substantial part of your home is set aside exclusively for the work.

If you use one or more rooms entirely for business (as an office or workshop, for example), there will be tax on part of the gain when you sell the home. You will have to agree the proportion with the tax officer, who may base it on the number of rooms you use or market value if the business part could be sold separately. If you claim part of the mortgage interest as a business expense, the same proportion of the gain is likely to be taxable.

Away from home

If you don’t live in your home for all the time you own it, you may lose some of the private residence relief – even though it is the only home you own or you have nominated it as your main home. Normally you will have to pay capital gains tax on the following proportion of the taxable gain:

    Number of complete months of absence
    _______________________________

    Number of complete months of ownership

Only months of ownership or absence since 31 March 1982 count in working out the proportion – earlier gains are outside the scope of the tax.

In practice, you can be away from the home for considerable spells of absence without losing any private residence relief. You can retain it during absence for the following periods:

• the first year of ownership while you are building, rebuilding or modernising the home. This can be extended for another year if you can convince the tax officer it is necessary. To retain the exemption, you must move in within the one-year (or two-year) period
• the last three years of ownership – even if you have already moved out
• any other absences totalling up to three years, provided you live in the home both before the first absence and after the last.

You may also be able to retain private residence relief if work takes you or your spouse away from home. If your employer requires you to live away from home in the UK, you can go on getting private residence relief for up to four years of absence. If your employer requires you to work abroad, you can get relief indefinitely. But you must live in the home before the first absence and normally also after the final absence.

Provided you intend to live in your home in the future, private residence relief continues if you or your spouse are required to live in job-related accommodation. Self-employed people who have to live in work-related accommodation (for example, over the shop or at the club) can go on getting relief on their own homes as long as they intend to live there eventually.