Introduction »

The paper residence

The capital gains tax (CGT) exemption for gains made on the sale of your home is one of the most valuable reliefs from which many people benefit during their lifetime.

However, only a property occupied as a residence can potentially qualify for the exemption. For example, an investment property in which you have never lived would not qualify. The term occupied as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to qualify. In practice HMRC look for the 'quality rather than the quantity of residence' and look to establish that the dwelling must have become the owner’s home. Examples can include:

• utility bills demonstrating usage
• financial correspondence
• entertaining friends or family in the property
• moving own furniture, pictures or ornaments into the property
• undertaking work on the property.

But what is the position if you have more than one residence?

It is increasingly common for people to own more than one residence. However, an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple (or civil partnership), there can only be one main residence per couple. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although foreign tax implications may then need to be brought into the equation.

Get the paperwork right…

The election must normally be made within two years of a change in the number of residences. Choosing which property should benefit is not always easy since it depends on which is the more likely to be sold and which is the more likely to show a significant gain. Missing the two year time limit can mean that HMRC will decide which property was the main residence, on any future sale.

Deemed residences

One area to watch out for is 'deemed residences'. Take for example Kevin who lives in Essex and owns a house there, but gets a new job in Leicestershire. He rents a property in Leicestershire on an assured shorthold tenancy and returns to Essex every weekend.

Kevin has an interest in the property in Leicestershire as he has a tenancy and needs to consider making the election. If Kevin had only been occupying the house in Leicestershire under licence for example, being given permission from say a friend, or if he had been staying in a hotel, he would not be treated as having an interest and an election would not be necessary.

It is quite likely that Kevin will not have appreciated the fact that he should make an election. The issue then is based on the facts, which could mean that the Leicestershire property is determined as his main residence. The result of this would be that the only residence likely to give rise to a gain on disposal would not attract relief. However, help may be available from HMRC using a concession which allows an extension to the two year time limit in circumstances where:

• an individual has or is treated as having more than one residence and
• their interest in each of them, or in each of them except one, has no more than a negligible capital value on the open market (eg a weekly rented flat, or accommodation provided by an employer) and
• the taxpayer was unaware that such an election could be made.

In such cases the election can be made within a reasonable time of the individual first becoming aware of the possibility of making an election, and it will be regarded as effective from the date on which the individual first had more than one residence.

As you can see there are traps for the unwary. If you are concerned that this could affect you and need further advice please contact us.

Introduction »