In this second article looking at tax planning pitfalls and opportunities associated with the family home, we look at the capital gains tax problems that can arise.
Assuming your family home has gone up in value since it was bought, capital gains tax (“CGT”) may be payable on sale. However, where the house has been your only or main residence throughout the period of ownership (and certain periods of absence), principal private residence relief (“PPR”) is available to relieve the tax charge.
As well as providing relief on the house itself, gardens or grounds which go with the house of up to 0.5 hectares should also qualify for relief. A larger area may qualify where the size and character of the house are deemed to need more land. Grounds can include drives, paddocks and orchards, but will not encompass any property with a commercial or agricultural use.
Care needs to be taken in relation to land which is retained after the main house has been sold: if you sell your house, but retain part of the garden in the hope that it may be sold separately with planning permission, the whole gain on that land when later sold may be chargeable, not just the gain since the house was sold.
PPR is only available for the period for which the house has actually been occupied by the owner, but will always automatically be available for the last three years before sale. The gain is apportioned throughout the ownership period, and then reduced for periods where the property has been unoccupied.
Mr & Mrs Carter buy Hove House in 2000 for £1m, then move out in 2004 before finally selling it in 2013 for £2.2m, a gain of £1.2m.
They owned the house for 13 years, but occupied it for only four: combined with the final three years before disposal that means they qualify for relief for seven out of 13 years (about 54% of the time).
Therefore, they will not qualify for relief on 46% (or £553,846) of the gain, and will pay tax at 28% on it (assuming that they are higher rate tax payers).
However, some absences will not lose the relief. Provided you live in the property again afterwards, any absence of up to 3 years will still qualify for PPR. Also, being absent from the house for work abroad, or living in work provided accommodation can mean PPR still applies.
If the house has been rented out for part of the ownership period, lettings relief may apply to up to £40,000 of gains during the rental period. To take Mr & Mrs Carter’s case, if they had let the house for the period of 6 years when they did not live in it, they could have reduced the gain by £80,000, as the relief can be claimed by both co-owners.
More than one house?
It is not unusual to use more than one house as a main residence, and even second houses occupied under a lease can count as your main residence for PPR. It is a matter of fact which one counts as your “main” residence for PPR, unless you make an election as to which residence should qualify.
This needs to be made within two years of actually starting to live in both houses as residences, not just when you acquire the second house. Married couples and civil partners can only have one main residence between them.
The PPR election coupled with the automatic exemption for the final three years allows what has become known as ‘flipping’. If you own two houses, each of which count as your residence, but one is standing at a higher gain (and typically has been owned for a shorter period), the election can be made over that property before a sale, then ‘flipped’ back to the other property after a short time.
This will mean that PPR will be available for the three years before sale (the effect is retrospective), which may wipe out the gain. If the other property is sold, PPR will be available, with the exception of the short period where the second property was subject to the election.
Though HMRC have made the wording of their guidance on this topic somewhat less encouraging in the wake of MP’s enthusiasm for the scheme being revealed, it is still permitted.
Though flipping is within the tax rules, the second property must genuinely have been your second residence. Buying a property with the motive of selling it at a profit means that the relief will be disallowed but other circumstances involving the sale of the property may also jeopardise the relief.