With house prices on the increase selling your home might look like a great idea. Most people are unaware that when selling a home you may have to pay tax on the profit made from the sale, particularly when you together with your spouse or partner have more than one, or are fortunate enough to split your time between a town and country residence. The rate depends on the amount of profit you make on the sale and whether you pay tax at the basic rate or are a higher rate taxpayer. If you pay tax at the lower rate the capital gain will be taxed at 18%, and if at the higher rate, the gain will suffer tax at the rate of 28%.
Can you avoid CGT?
Homeowners selling or planning to sell a home or one of them are often not aware of the impact of a particular capital gains tax relief known as Principal Private Resident Relief (PPR). The PPR is set out in s.222 of the taxation of Chargeable Gains Act 1992 which enables individuals to sell their main residence without incurring anyCGT on the capital gain made upon the sale of that residence.
PPR applies to freehold property or leasehold property, and subject to certain limitations includes outbuildings and surrounding garden or land falling within the limits defined as a “permitted area”.
If an individual resides in two or more houses at the same time as the main residences, he or she must elect one of them to be the main residence at any one time for PPR. He or she can nominate which residence is to be treated as the main residence at any time or for any particular periods
The nomination must be made within two years of the date that the residences in question are occupied. If there is a change in one or more of those residences, a new two-year period begins from the date of that change. If no nomination is made, it may be a question of facts and evidence as to which property is the main residence.
Spouses married to each other and those in a civil partnership living together can have only one main residence between them. If each spouse or partner has a separate residence, the couple must jointly nominate which of the two residences shall be the principle private residence. The two year deadline for the election begins as at the date of marriage or registration as civil partners.
If the spouses or partners separate, each will then have a separate election to make on each property within two years of the separation.
Can you do this for properties outside the UK?
PPR may also be claimed on a property which is outside the UK, if the property is the main residence and is subject to UK capital gains tax. Non-domiciled persons resident in the UK should not make an election if he or she is taxed on the remittance basis, and the foreign gains are not taxable in the UK unless remitted.
How do I claim?
In order to claim PPR, occupation of the principal residence must be with some degree of permanence. The rules contain certain periods of deemed residence for temporary absences for work or during renovations. The final period of ownership is deemed to be a period of residence regardless of whether it is occupied or whether another property is the principal private residence at the same time. The final period used to be 36 months, but as from 6 April 2014, it has been reduced to 18 months.
There are circumstances where PPR may be claimed where the main residence is not owned by the claimant. In terms of section 225 of TCGA, if the property is owned by trustees and a beneficiary occupies the property as his or her sole or main residence under the terms of the trust, the property will be subject to the same relief if the trustees and the beneficiary make a joint election under s 222(5)(a) to that effect. The election must be made within 2 years of the beneficiary’s first occupation of the property.
Advice should be sought in situations of change, whether buying or selling, and in particular where changes in marital or co-habitation arrangements or changes involving relocation for work or other reasons impact at the same time.
If you have any questions about this topic please contact our tax specialist James Wolfson, on 01273 664 084or email James.Wolfson@healys.com