Capital Gains Tax Relief depends on the property being your permanent residence.
Living in a second home temporarily to avoid capital gains tax is a practice that’s gone on for a long time. But a recent court case puts the practice into doubt as the HM Revenue & Customs (HMRC) have won a test case on the issue of “permanence”.
When you sell your home that has been lived in as your main and permanent residence it is exempt capital gains tax (CGT) if it can be determined by HMRC to be a person’s ‘principal private residence’.
However, any other properties that you own cannot be classed as you principal residence and will therefore attract CGT on any capital gain made on the sale.
HMRC does not rule out entirely the possibility that a relatively short residency can be granted relief, as their rules state that “even occasional and short residence can make a residence, the question is one of fact and degree”.
A capital gain is calculated by deducting the purchase price, plus buying costs, such as solicitor’s fees etc, plus any capital expenditure you made on the property over the period of ownership, from the sale price, less your selling costs.
After deducting from any gain your personal allowance of £10,900 (2013-14), and you are entitled to two allowances if the property is in joint ownership with your partner, for example, the balance will be taxed at currently (2013/14):
– 18 per cent and 28 per cent tax rates for individuals (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first )
– 28 per cent for trustees or for personal representatives of someone who has died
– 10 per cent for gains qualifying for Entrepreneurs’ Relief
Sometimes sellers will try avoiding this tax by moving into a property temporarily before selling it.
Unfortunately for them a recent case could put an end to this practice.
The case of Piers Moore v HMRC (2013) concerned a capital gain made on the sale of a property and whether the gain qualified for Capital Gains Tax (CGT) ‘main residence relief’. The key question here was whether the property was, or was not, Mr Moore’s “only or main residence” being only for a short time between November 2006 and July 2007.
In cases like this, what is considered is the “quality” rather than the “quantity” of occupation for ‘main residence relief’ purposes. This case throws some light on to what “quality” occupation may be defined as in future.
Having separated from his wife, Mr Piers Moore moved into a rental property he owned, in 2006.
The property had been rented out for the previous four years. Mr Moore registered for council tax at his new address but some of his post and his bank account statements were sent to his new partner’s address. Some months later he purchased another property together with his new partner and then he sold the rental property he had been living in for these several months.
The judge ruled that even though Mr Moore had lived in the property exclusively, meaning he did not live elsewhere at the same time as his occupation of the house, the judge was concerned about what is termed the ‘permanence’ of his residency.
The court ruled that Mr Moore’s occupation of the property was not permanent but a ‘stop-gap measure’ purely to tide him over during the completion of the purchase of his new home.
The judge said that a short period of occupation would not necessarily mean “principal private residence” relief could not be granted, but a distinction was to be made between “temporary occupation” and ‘true’ residence.
It is likely that HMRC’s scrutiny of principal private residence relief will increase in future and anyone living in a property, for however long, should ensure that everything possible is done to establish and evidence full residency as a fact. For example, paying Council tax, registering on the electoral role, having all mail redirected and utility bills placed in the taxpayer’s name.
The taxman is currently having a crack-down on owners of second homes and rental properties, but a tax amnesty had been declared until Friday 6th of September 2013.
Taxpayers had until the 6th to settle their tax bill with HMRC for any sales of properties that are not a main residence, including holiday homes and homes abroad.
After this deadline, HMRC will be carrying out investigations into anyone who has sold second home properties and have paid no capital gains tax.
HMRC have said it is still not too late to contact them to tell them about your tax liabilities.
It is reported that around 1.6 million people have a second home in England and Wales, with a further 820,000 owning a second property abroad.