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TaxationWeb by Philip McNeill, TaxAid

Individuals on relatively modest incomes could face an unexpected tax bill when they sell the family home in certain circumstances. Philip McNeill of the Charity TaxAid outlines the potential tax relief and pitfalls for those selling their only or main residence.For many people on a modest income, the house they live in is their only substantial asset. Private Residence Relief means that Capital Gains Tax should not be due when the house is sold. However, for family and other reasons, the position can become rather complicated.

Case Study

Consider the following scenario. Mrs Franks buys a flat to live in, and lives there for five months. Then she moves out to look after her elderly mother who lives in rented accommodation. She lets the flat to her son and his family.

After five years, Mrs Franks decides to sell the flat and buy somewhere larger, where all the family can live. She will need to reinvest all the proceeds in order to buy a large enough house.

Is Mrs Franks entitled to Private Residence Relief when she sells the flat?

Private Residence Relief

The starting point is s 222 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). To qualify for Private Residence Relief, a person has to live in a property as their only or main residence for at least part of the time of they own it. “Quality” matters here more then quantity. A period of five months actually living in a flat as a home, can establish the right to some Private Residence Relief. Five years ownership of a holiday house on the other hand might not.

Once the right to some Private Residence Relief has been established, some other benefits accrue:

1. The last 36 months of ownership qualify for relief, even if you are not living there. (TCGA 1992 s 223(2)(a)).

2. You can be away for work or other reasons within certain limits and still qualify for these periods. (TCGA1992, ss 222(8) and 223(3)).

3. Letting relief may be available. (TCGA 1992, s 223(4)). Letting relief applies where a house that has been a main private residence is let as residential accommodation. Any chargeable gain is reduced by up to £40,000. (If the amount of the gain covered by Private Residence Relief is less than £40,000, then the letting relief will be the same amount as the Private Residence Relief).

Any remaining gain can be reduced by taper relief (TCGA 1992, s 2A) and the Annual Exemption may cover what is left. In this example, Mrs Franks may have no Capital Gains Tax to pay.

Practical Points

Some practical points are worth noting here.

1. It is essential to establish the facts, and make the correct claims. If Mrs Franks had made incorrect claims or failed to establish the correct facts and made returns to the Inland Revenue on this basis, she would have received an unexpected tax bill. Capital Gains Tax bills can be large – bills of £15,000 or more are not uncommon even on modest property gains.

2. Private Residence Relief can become very complex. Issues such as the treatment of annexes and outbuildings, the size of gardens / grounds, the motivation for sale when development gains are in issue, and the order of sale of house and grounds can all have a substantial impact.

3. Ownership of two properties, or even renting a second property as a main residence, can occasion the need for a Capital Gains Tax election as to which one is your main home for Private Residence Relief.

4. The calculation of gains for properties owned before 6 April 1998, or before 6 April 1965 is more complex.

5. If your circumstances are anything but straightforward, it is best to take advice from a reliable source.

This article has been prepared by TaxAid as a general introduction to the subject. It is recommended that you take professional advice in your own specific circumstances.

TaxAid is a charity which offers free, confidential advice on tax to those on low income. For more information about TaxAid, please visit our website at www.taxaid.org.uk.

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