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Capital Gains Tax & UK Residential Property (Part 2)

24/03/2021

Following on from our Part 1 blog post about recent changes to Capital Gains Tax (CGT) and UK residential property sales – in part 2, we conclude with the qualifications required for a UK residential property to be accepted as a taxpayer’s main or sole residence.

Is your residential property still your main residence and therefore exempt from Capital Gains Tax (CGT)?

The basic rule that qualifies a property as a main residence, and therefore making it exempt from CGT under the private residence relief (PRR), is that it is occupied as the taxpayer’s sole or main private residence. Spouses or civil partners living together are both entitled to PRR for that property occupied and owned jointly.

In addition to the sole or main residential property, you can also include up to half of a hectare (around 1.2 acres) of grounds and gardens – but this includes the land the house is built on.

What if the aggregate land size of the sole or main residential property’s grounds is more than half a hectare?

Well – you may still be entitled to PRR, if it can be shown that the extra land is required for the reasonable enjoyment of the property, with regards to the size and character of the main or sole residential property.

To be reasonably enjoyed it is important that parts of the grounds are not fenced off so as to limited access i.e. hinders the owner’s enjoyment of those grounds.

As you would expect, HMRC considers that required garden and grounds larger than half a hectare are the exception. It all depends on the facts of a particular case, but there are recent court decisions that show that it is possible to require more than half a hectare of grounds and gardens for the enjoyment of a main or sole private residential property.

A recent case before the court allowed PRR for a house and grounds totalling 0.94 of a hectare – as such grounds were shown to be required for the size and character of the house concerned. In this case, it was shown (as supported by an expert witness) that other properties in the area also had grounds of a similar size.

Given that PRR cost the Exchequer some nearly £27 billion in the tax year 2018/19 – it came as no surprise that the Chancellor, in his Budget last year, tightened the main residence CGT rules to limit the PRR to the owner-occupier of their sole or main residential property.

Letting relief

For property sales on or after 6 April 2020 the additional CGT relief – known as ‘letting relief’ with a maximum CGT relief of £40,000 – no longer applies on the disposal of those main residences that, in addition to being occupied by the owner as their sole or main residence for a part of the period of ownership, the whole property has also been let for part of the ownership period. Letting relief can still be claimed if the owner still occupied the property along with the tenant(s) for the period that the property has been let.

Also, the final period exemption of 18 months is reduced to 9 months for main residence disposals on or after 6 April 2020. This final period exemption originally started life some years ago as 3 years and then became 18 months and is now 9 months. The final period exemption is meant to ensure that if you have not sold your main residence and you have bought your next main residence – you own two main residences – then you have a 9 months additional period which qualifies for the PRR on the eventual disposal of the first main residence even though you were not occupying the first main residence during those final 9 months of ownership. The final period of exemption remains at the original 3 years if the owner of the main residence is disabled or has had to go into long term care.

Working from Home (COVID-19)

If you are an employee having to work from your sole or main residence (home) then it will be good to know that HMRC considers that your PRR remains intact for CGT on a future disposal of your home provided you only exclusively use one room for your work. Where a substantial part of your home is used as an office then the PRR will be restricted on a future sale of your main residence.

Working from Home (Self-Employed)

This is not quite so straight forward as if you use ‘any’ part of your home ‘exclusively’ for your trade or profession then on a future disposal of your home a proportion of any gain relevant to the exclusively business used part of the home will be liable to CGT.

So if self-employed ensure that you have evidence to show that the room(s) you use for your work are also used for other non-work activities i.e. rooms at your home are not exclusively used for your work.

HaesCooper can help you with your UK fiscal requirements whether they are a small, medium or large. To learn more or to discuss your needs – contact us.