Capital Gains Tax – Main Residence Exemption

Written by Robert Usher-Somers on June 18, 2013

Gains realised on the disposal of the house or flat which an individual occupies as his or her main residence are generally exempt from UK capital gains tax.  Nevertheless clients’ affairs are often not as straightforward as this. For example an individual may have more than one residence, spending part of the time in each, or he may cease to occupy his main residence, let it for a period and then perhaps sell it.

The law allows an individual who has two or more residences to make a formal election to choose which one is his main one for capital gains purposes, provided he does so within two years of having the second residence. Incidentally you can “have” a residence without owning it. Once an election has been made it can be varied at any time thereafter. However if no election is made, the decision as to which of two or more residences is an individual’s main one, will be determined by the inspector of taxes. A husband is not allowed to have a separate main residence from his wife and if electing, both must elect together.

Included within the definition of main residence is surrounding land of up to ½ a hectare or such further area as may be required for the reasonable enjoyment of the property having regard to its size and character. 

It is also possible for this exemption to apply where a beneficiary of a trust is entitled under the terms of that trust to occupy the property.  In certain circumstances, the exemption may also be extended to a property which is sold for more than probate value if the legatee had a relevant entitlement to the property and occupied it both before and after the deceased’s death. 

Subject to conditions, further relief may also be due for periods of letting or if the individual is required by his employer to live elsewhere.

Recent years have seen significant increases in property values and can give rise to substantial capital gains tax liabilities for their owners on  sale (or gift) unless covered by the main residence exemption.  This is an area where significant tax savings may be achieved with careful planning, but timing is a key factor as is consideration of the relative increases in value of the respective properties. We often find that clients tell us about a second or third property long after the time limit for making any election has passed. We encourage clients to tell us of additional properties to ensure that planning opportunities are maximised.