In most cases, if you make a gain on the disposal of your main residence, it's exempt from capital gains tax (any loss is not allowable as a deduction from other gains).
Updated 23 July 2020
People who own more than one home may either accept which is the main residence as a matter of fact, or elect which one is to be treated as such. This nomination must be made within two years of the acquisition of a second home.
This practice was coined 'flipping' – choosing the home with the larger gain or the one that will be the first to be sold, but also taking maximum advantage of the special rule relating to the final period of ownership. This treats the last 18 months of the period of ownership of a property that has been the main residence at some point, as occupied as the main residence in this final period, even if it coincides with ownership of another property in relation to which the exemption had been claimed.
This disregarded period is to be cut to 9 months for disposals after 5 April 2020. The period disregarded for disposals by disabled persons or long term care home residents will remain at 36 months.
Careful use of ‘flipping’ effectively allows an individual to have two main residences qualifying for the exemption for this disregarded period.
As a result of extending capital gains tax to non-residents' gains on UK residential property from 6 April 2015, changes to the main residence exemption became necessary. For a property to be treated as a main residence in a tax year, the claimant must occupy it (or other residences in the same territory) for at least 90 days in that tax year (or proportionately fewer if it is owned for only a part tax year).
Be mindful that a rented flat can be a main residence. Someone who owns a weekend country cottage but has more connection with a rented London flat should elect for the cottage to be treated as their main residence, as they can't make a capital gain on the rented flat. Without the election a gain on selling the cottage would be taxable.
An extrastatutory concession, which is to become statutory by inclusion in Finance Act 2020, removes the 2 year time limit for electing which of two more residences is the main one if the only other ‘residences’ held have been of no more than a negligible value.
Another extrastatutory concession, also to be replaced by Finance Act 2020, applies if there is a delay in taking up occupation of a new home. Under the concession, where someone…
- acquires land on which he has a house built, which is then used as his only or main residence; or
- buys an existing house and, before using it as his only or main residence, arranges for alterations or redecorations or completes the necessary steps for disposing of his previous residence
…the period before the individual uses the house as his only or main residence will be treated as a period in which he so used it.
This is provided that the delay is not more than a year. In exceptional circumstances which are outside the individual's control, it will be extended up to a maximum of two years.
Under the Finance Act 2020, from 6 April 2020, a property will be treated as your only or main residence for up to an initial two years if occupation is delayed by the completion of the construction, renovation, redecoration or alteration of the home or the disposal of your previous home. This is provided that the property is not another’s residence during this delay period.
The gain that is exempted is determined by reference to the period during which the property was your only or main residence compared with the period of ownership. Certain periods where you are absent as a result of employment elsewhere are treated as continued occupation.
Furthermore, if the property, or part of it, has been let during your period of ownership, the part of the gain that would otherwise be chargeable will be reduced by a maximum of £40,000. This ‘letting allowance’ is to be available on disposals after 5 April 2020 only if part of the property is your only or main residence while another part is let as residential accommodation.
A recent case
The Court of Appeal has reversed the decision of the Upper Tribunal (UT) in a recent case [Desmond Higgins v HMRC]. UT's decision would have meant your period of ownership began when you exchanged contracts. Consequently, the interval that normally exists between exchanging contracts to buy a home and completing the purchase would not be part of your period of occupation. The effect of this is illustrated in the example below. However, the Court of Appeal has ruled that your ownership commences when you complete the purchase. It is possible that HMRC will appeal the decision of the Court of Appeal, of course. But for the time being it seems that common sense applies.
Adam and Eve bought their house for £1.35m (including stamp duty and purchase costs) in 1995 exchanging contracts on 6 February with completion on 6 March. The house needed a lot of repair work so they were only able to move in on 15 December 1995. They exchanged contracts to sell the house for £2.75m (after costs of sale) on 6 April 2019. They occupied the house as their main residence for all the intervening period save for twenty months from 3 April 2007 when it was fully let and twelve months before its sale in April 2019.
Their overall gain (assuming no enhancement expenditure has been incurred) is £1.4m. The total period of ownership is 290 months. The last 12 months' non-occupation is disregarded but the twenty months when it was let and the first month before completion is non-occupation. So only 269/290ths of the gain is exempt – £1,298,621, plus the 'letting allowance' £40,000, leaving £61,379 chargeable.
If the acquisition and disposal were both twelve months later, only the last nine months would be disregarded, and the letting allowance would not be available. So the exemption would be cut to 266/290ths of £1.4m, £1,284,138, leaving £115,862 chargeable.
Specific advice should be obtained before taking action, or refraining from taking action, on the basis of this information, which reflects draft clauses intended to be included in the Finance 2020.
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