The Family Home Print
In most cases the family home will be the single most valuable asset within the family, and provided the home is the Principal Private Residence (“PPR”) of the owner, it should be fully relievable from CGT on its sale.
To qualify as the PPR, the home must be the owner’s only or main home, although an election may be made to treat another home, possibly a holiday home, as the PPR for CGT purposes. The election must be made within 2 years of the acquisition of the second or further property. The election may have effect for up to 2 years prior to the date on which it is made.
If an election is not made within 2 years after the acquisition of the second property, an election can only be made within 2 years of the acquisition of a third or additional property, whether or not this involves the disposal of either of the first two properties. The period for which no election has been made is dealt with on a “matter of fact” basis so that the exemption for that period would apply to the home which was actually being used as the PPR.
There could be many reasons why the owner may wish for a second home to be treated as the PPR, and enjoy the benefits of the CGT exemption. It may be that he has no intention of selling the main family home during his lifetime, in which case he would be better off electing for the second home to be treated as the PPR so that on an eventual sale of the second home it would be exempt from CGT. Alternatively, it may be that the second home is in an expensive location, and that its value is increasing faster than the value of the main house, and the owner is anticipating a sale of the second home. Whatever the reason, the owner has the right to choose whichever of his homes to be his PPR provided an election is made within the first two years of acquiring the second property. Once an election has been made, it may be varied at any time to treat another property as the PPR. The election may also treat the variation as being effective for up to 2 years prior to the date on which it is made.
The CGT exemption applies to properties which occupy land up to 0.5 Hectares (a little over an acre), or such larger area required for the reasonable enjoyment of the home, having regard to its size and character. Where the land occupied exceeds the requirements of the property, the excess area will give rise to a CGT liability on disposal.
Where the owner does not live in the property throughout the period of ownership, the following periods of absence will also be regarded as relievable from CGT provided that the home is the owner’s PPR both before, and after the period of absence:
- A period, or periods of absence not exceeding 3 years.
- A period of absence of any length throughout which the owner has worked in an employment the duties of which were all performed outside the UK. Although the owner would be able to spend holidays in the UK, any duties carried out in the UK, including incidental duties, would exclude the period of absence from this relief.
- A period, or periods, of absence not exceeding 4 years where the owner was prevented from living in the home due to the situation of his place of work, or as a result of any condition imposed upon him by his employer requiring him to live elsewhere, providing that this condition is reasonably imposed by the employer to secure the effective performance of the duties of the employment.
Any period of occupation prior to 31st March 1982 is disregarded in calculating the PPR relief due.
For disposals on or after 6 April 2014, the last 18 months of ownership are relieved from CGT provided the property has, at any time during the period of ownership, been the owner’s PPR. For disposals prior to 6 April 2014 this relief covered the last 3 years of ownership.
There may be some scope to elect for a second property to be the PPR even if it is the owner’s intention to sell the main home. Provided the sale is made within 18 months of the effective date of the election, the main home would remain fully relieved from CGT, and the second home would also benefit from the relief for the period the election is made.
PPR relief may also be claimed where there is a delay in taking up residence. Relief is allowed for a period of up to 12 months (24 months where it can be shown that there were good reasons for the delay which were outside the individual’s control). PPR relief will be due where an individual acquires land on which he has a house built, which he then uses as his PPR; or where he acquires an existing house, and before using it as his PPR, arranges for alterations or redecorations, or completes the necessary steps for the disposal of his previous PPR.
The PPR relief only applies to the entire home if it is used wholly as the PPR. If a part of the home has been let to a tenant as residential accommodation, it is necessary to apportion the gain between:
- The periods the property has been let, and the periods it was wholly occupied as the PPR;
- The proportion of the property which has been let and the proportion occupied as the PPR.
- The chargeable gain arising on the let part of the property is then reduced by the lower of £40,000, or the amount of the gain which is exempt.
John bought his house in April 1997 at a cost of £200,000. The house has 8 rooms, and in April 2000 he lets 4 of the rooms to a residential tenant for 8 years. He then sells the house in October 2014 for £750,000. He has no other gains in the year, and is a higher rate taxpayer. The CGT payable is calculated as follows:
April 1997 to April 2000 (3 Yrs)
April 2008 to October 2014 (6.5 Yrs)
April 2000 to April 2008 (50% x 8 Yrs)
|Relief due: 13.5/17.5 x £550,000||424,286|
|Less Residential Letting Relief||40,000|
|Less Annual Exemption||11,000|
|CGT thereon @ 28%||20,920|
If the property had been owned jointly by, say John and his wife, each of them would be entitled to the £40,000 Residential Letting Relief.
Where an individual uses part of his home for business purposes, maybe as an office if he is self-employed, and works from home; this should not give rise to a liability to CGT unless a room or rooms are set aside wholly for business use. If the rooms are used partly for business, and partly for domestic purposes, then the PPR relief will continue to apply. If rooms are set aside wholly for business purposes, then the relevant proportion of the gain will be liable to CGT. It may be that a new home is purchased and that the business will be run from the new home, again, with rooms set aside for the business. In this case, it may be possible to claim roll-over relief (see below) to defer the gain until the second property is sold, or the business ceases.