Capital gains tax traps for homeowners
18 April 2023
A common misconception is that a property will be fully exempt from tax as long as it has been occupied as a main residence at some point. However, private residence relief (PRR) actually works by time apportioning the gain by the period of occupation out of the total ownership period. Therefore, if the homeowner has been absent from the property, for example, if they have been stuck abroad during Covid lockdown restrictions, a chargeable gain may arise in their period of absence.
Some periods of absence can still benefit from relief but to qualify, the homeowner usually needs to return to occupy the property. An exception is where the homeowner is prevented from re-occupying due to work, and in that case, the qualifying period of absence can be unlimited if the homeowner is working overseas. A homeowner that owns more than one property may also need to have submitted a nomination to HMRC to benefit from this. This point may be well known to MPs as they have recently received specific guidance on the PRR rules from HMRC but many other taxpayers are likely to be unaware of these rules.
In recent years, many taxpayers have been working from home. A further tax relief trap is that if any part of a residence is used exclusively for business, PRR will be restricted. Similarly, if homeowners have opened their doors to lodgers to generate some extra income, HMRC may restrict PRR accordingly. Since 2020, relief is only available if there is shared occupancy by the homeowner with their lodgers, so self-contained accommodation within a residence is unlikely to qualify for relief.
With the increase in flexible working, many homeowners have upsized or bought a second home out of the city. Homeowners need to be aware that larger areas of gardens, grounds and outbuildings may not be automatically exempt. Furthermore, it is only possible to have one main residence at any time, and married couples or civil partners who live together must have the same main residence.
Wider changes in recent years have severely limited the amount of relief available in other areas. If a homeowner moves out before selling their home, only the final nine-month period is now exempt. If it takes longer to sell the property, a tax charge can arise. Coupled with an additional 3% stamp duty land tax surcharge payable where a buyer already owns another property (similar property tax surcharges also apply in similar circumstances in Scotland and Wales). Although though this could become refundable if the purchase is a replacement of a main residence, it could lead to serious cashflow difficulties during the home moving process which may catch taxpayers off guard.
The good news for some is that as of 6 April 2023, PRR relief for assets transferred between divorcing couples has been extended. Where a spouse retains an interest in the sale proceeds of the former matrimonial home, that individual will be able to apply PRR in the same proportion that relief applied to in the original disposal. However, we are still awaiting the detail behind these proposed rules and it is possible that those who leave the marital home may be hit with a CGT liability on their new property further down the line.
If a homeowner is caught by any of these traps, they now only have 60 days from the date of completion to calculate their tax position and make payment to HMRC. This can be an extremely tight timeframe given the complexities that can apply to calculating the relief available. The annual CGT exemption is now reduced to £6,000, giving less wriggle room. Good record keeping is therefore essential to smooth the way, and it could be wise to set up an online UK Property Account with HMRC, even if it transpires no tax is payable.
Some periods of absence can still benefit from relief but to qualify, the homeowner usually needs to return to occupy the property. An exception is where the homeowner is prevented from re-occupying due to work, and in that case, the qualifying period of absence can be unlimited if the homeowner is working overseas. A homeowner that owns more than one property may also need to have submitted a nomination to HMRC to benefit from this. This point may be well known to MPs as they have recently received specific guidance on the PRR rules from HMRC but many other taxpayers are likely to be unaware of these rules.
In recent years, many taxpayers have been working from home. A further tax relief trap is that if any part of a residence is used exclusively for business, PRR will be restricted. Similarly, if homeowners have opened their doors to lodgers to generate some extra income, HMRC may restrict PRR accordingly. Since 2020, relief is only available if there is shared occupancy by the homeowner with their lodgers, so self-contained accommodation within a residence is unlikely to qualify for relief.
With the increase in flexible working, many homeowners have upsized or bought a second home out of the city. Homeowners need to be aware that larger areas of gardens, grounds and outbuildings may not be automatically exempt. Furthermore, it is only possible to have one main residence at any time, and married couples or civil partners who live together must have the same main residence.
Wider changes in recent years have severely limited the amount of relief available in other areas. If a homeowner moves out before selling their home, only the final nine-month period is now exempt. If it takes longer to sell the property, a tax charge can arise. Coupled with an additional 3% stamp duty land tax surcharge payable where a buyer already owns another property (similar property tax surcharges also apply in similar circumstances in Scotland and Wales). Although though this could become refundable if the purchase is a replacement of a main residence, it could lead to serious cashflow difficulties during the home moving process which may catch taxpayers off guard.
The good news for some is that as of 6 April 2023, PRR relief for assets transferred between divorcing couples has been extended. Where a spouse retains an interest in the sale proceeds of the former matrimonial home, that individual will be able to apply PRR in the same proportion that relief applied to in the original disposal. However, we are still awaiting the detail behind these proposed rules and it is possible that those who leave the marital home may be hit with a CGT liability on their new property further down the line.
If a homeowner is caught by any of these traps, they now only have 60 days from the date of completion to calculate their tax position and make payment to HMRC. This can be an extremely tight timeframe given the complexities that can apply to calculating the relief available. The annual CGT exemption is now reduced to £6,000, giving less wriggle room. Good record keeping is therefore essential to smooth the way, and it could be wise to set up an online UK Property Account with HMRC, even if it transpires no tax is payable.
