Avoiding Capital Gains Tax on Homes

June 22nd 2009

There seems to be confusion as to when gains from the sale of a person’s home can be exempt from tax.

A person’s home, where it is their only or “main” residence, may be exempt from capital gains tax (CGT) on disposal. 

If someone has more than one home they can elect as to which home is their “main” residence for the purposes of CGT and will be, therefore, exempt on sale.  An election has to be made within two years of acquiring a second or other home.  Once an election has been made, it is possible to vary that election.  Whenever there is a change in the combination of residences a new period begins with a new opportunity to make a nomination.

For example, a person had a single residence until 1 April 2002. On that date she acquired a house and began to use it immediately as her second residence. She has until 31 March 2004 to nominate one of these residences as her main residence.

In 2005 she bought another house and began to use it on 1 July 2006 as a third residence. A new period begins in July 2006 and she has until 30 June 2008 to nominate one of these three residences as her main residence.

On 1 May 2009 she disposed of a residence. A new period begins and she has until 30 April 2011 to decide which of her remaining two houses is her main residence.

In some cases an individual may have more than one residence but not be aware of it. For example an individual may work in London from a weekly rented flat, where she spends most of her time, but own a country cottage which is used as her residence when her work allows.   If the flat is rented under a tenancy it counts as a residence for these purposes and an election can be made.

The extent of the garden or grounds of a person’s residence may affect the amount of relief available.

Having let out a home may not be a barrier to obtaining some relief from CGT on disposal; and in certain circumstances a dwelling house which is not a residence of an individual is treated as her residence for the purpose of computing private residence relief. These include persons currently living in job related accommodation, and for periods of absence because of working abroad.

For advice and assistance please contact Lindsey Sherman on 0115 983 5580 or lsherman@edftax.co.uk