The Daily Telegraph - Saturday - Money
Selling your home? Mike Warburton looks at how to shelter property profits from the taxman
Despite the pandemic, a recent report says the value of British residential property has increased this year by 5.3pc, to a total of £ 7.6 trillion. That is all the more reason to make sure that you benefit in full from the best tax relief available: the principal private residence ( PPR) exemption from capital gains tax. In most sales exemption will be automatic – but there are a number of important issues to keep in mind.
The normal rule is that you are allowed the exemption only on one home at a time. However, selling homes can take time and you may need to buy before selling. A ninemonth overlap is allowed but this may be insufficient. If so, for tax purposes, gains accrue evenly over time – so even if you overshoot the nine months, the gain left exposed will probably not exceed your annual CGT exemption.
If you buy a second home, keeping both, you should submit an election to HM Revenue & Customs within two years to nominate which is your main home. This is likely to be the one on which the gain is expected to be larger, not necessarily the one where you spend most time. Even if you own a less valuable holiday home, the election of your main home is worthwhile
because you can change the election for a short period (perhaps a month) before reverting back, and benefit from the nine-month exemption on selling the holiday home. If you own the homes with your partner you must both elect.
Suppose you marry or enter into a civil partnership and you both have properties that you want to keep as homes, again make an election within two years of the marriage.
Many of us are working from home. This will not restrict the PPR exemption, as long as no part of the property is used exclusively for business. How about your office becoming a play area for the children at the weekend?
If you let part of your home to a single lodger who lives with you as part of the family there will be no restriction.
When a property is let it typically ceases to be your private residence, but there are exceptions that allow full relief to continue. A period of absence is not taken into account if the property was your PPR both before and after this period and it does not exceed three years. You can also qualify for up to four years if you had to live away for your job. A period of any length can qualify if you or your spouse had to work abroad.
Letting relief is still available if you continue to live in the property with the tenants. This is useful for student landlords. It allows additional CGT relief for up to £40,000 of the gain, limited to the gain on the let proportion.
When someone dies, they may leave their property in trust for a relative to live in rent-free. A PPR exemption can still be obtained but this is not automatic. Trustees should send a claim for the relief to HMRC within four years of the end of the first tax year concerned.
Be careful with buy-to-let properties. There have been cases where someone has claimed they lived in the property as their home for a few months, making an election in favour of this property, in order to obtain nine months or more of relief. Sometimes a claim is made on the basis of separation following marital difficulties. It must become your home with a degree of permanence.
Finally, remember we have new reporting obligations for residential property gains, which require the notification to be made and the tax paid within 30 days of completion. You should do this online but, confusingly, it seems to work independently from the self-assessment system. You will need to complete the information again with your self-assessment and the tax paid is allocated under a separate payment reference.