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X owned a home as his main, principal private residence, where he lived for several years with his partner P and their two children. X and P separated and X left that home (which he continues to own). He bought home 2 in July 2000; where he lived as his main residence until November 2001 when he moved to London. He then rented a house and uses it as a residence and also in connection with his self-employed business.
X owned a home as his main, principal private residence, where he lived for several years with his partner P and their two children. X and P separated and X left that home (which he continues to own). He bought home 2 in July 2000; where he lived as his main residence until November 2001 when he moved to London. He then rented a house and uses it as a residence and also in connection with his self-employed business.
Is it possible for home 2 to be eligible for the main residence capital gains tax exemption? If so, for how long (for example 3 years) and when should the elections be made? He may use it as a pied a terre but there could be practical problems.
What is the situation with the first home? The children are still very young, but X still owns that home.
(Query T15,979) - Slates & Tile Co.
The basic exemption for the only or main residence depends on the facts of residence, not on ownership. X appears to have had three residences in succession - the family home, home 2, and the rented house. There is a suggestion that he may still use home 2 occasionally, but he is presumably unlikely to use the family home as a residence anymore.
The family home is therefore a house which he owns, which used to be his only or main residence, and which he no longer lives in. Any gain on an eventual disposal will be time apportioned to the period of occupation over the total period of ownership (starting no later than 1 April 1982). The remainder will be chargeable. The last three years of ownership will be counted as 'deemed occupation' and exempt, even if he has another exempt residence by then; so if he disposes of his interest in this residence within three years of moving out, he will not be taxable on any of the gain.
There is a common tax plan for such situations, which is to establish a settlement for capital gains tax purposes under a 'Mesher order'. This is described in Tolley's Tax Planning 2001/02 at paragraph 39.8. The disposal to the settlement is exempt because it is effected within three years of moving out; any subsequent disposal by the trustees is then exempt under section 225, Taxation of Chargeable Gains Act 1992 on the grounds that the occupying ex-spouse and children are 'beneficiaries of the settlement' and are occupying the house as their only or main residence. This effectively gives X two exemptions at the same time, one on the basis of actual residence, and the other akin to the old 'dependent relative exemption'. Alternatively, some arrangement could be made to transfer title of the house to the ex-wife (for appropriate consideration, payable now or later), in which case any gain would be exempt because she would own and occupy as her own main residence (this line depends on many other factors about the assets and arrangements of the separation).
Home 2 appears to have been the only or main residence as a question of fact between July 2000 and November 2001. There is no need for any election to establish this. The stay is substantial, and unless there was something unusual about it, the Revenue would surely accept that it was his residence for that time. This means that that period of ownership will be exempt on a sale, and so will the last three years of ownership, even if he has another exempt main residence by that time. If he lets the property out in the meantime, he will be eligible for an additional exemption of up to £40,000, depending on the precise calculations required by section 223(4), Taxation of Chargeable Gains Act 1992.
From November 2001 onwards, it appears that his 'only or main residence' as a question of fact is his rented accommodation. If he is making gains on the houses he owns, this is a waste, because the exemption cannot benefit something on which no gain will arise. So he should consider the election under section 222(5), Taxation of Chargeable Gains Act 1992 for home 2. This can only be made if he still uses home 2 'as a residence'; so if he rents it out or otherwise never stays there, it is not permissible. If he does still stay in it occasionally, and still has furniture there (so that it can be properly regarded as a residence available to him, even if he only occasionally visits), the election must be made within two years of the time at which it becomes necessary to decide between the two - presumably this is some time in November 2003, the second anniversary of renting the property and ceasing to live full-time in home 2.
He should, therefore, be able to make all gains exempt on both the houses that he owns, as long as some action is taken within the next year or so. - Castlegate.
The querist uses the word partner in his query and so I am assuming that X and P lived together, but that they were not married.
As the clients are not married, X can make an election for his second house to be treated as his private residence and the election must be made by July 2002 being two years from the date of purchase of the second house. By virtue of section 223(1), Taxation of Chargeable Gains Act 1992, X will be deemed to occupy the second house for the last 36 months of ownership. This means that if he sells the house before November 2004, principal private residence relief will reduce the gain to nil.
If X will continue to own the house for a longer period, two other options are available:
(1) Let the property for a period of time, say 6 months, on an assured shorthold tenancy. Section 223(4), Taxation of Chargeable Gains Act 1992 provides that if a house has been a principal private residence of a taxpayer and at any time in that person's ownership the property is let, then further relief is available to reduce the gain on a sale. This is calculated as being the lower of the part of the gain that has been calculated to be exempt by reference to actual or deemed occupation and £40,000.
(2) Is X required to live in London for his work? If so, section 223(3)(c), Taxation of Chargeable Gains Act 1992 can enable X to treat a further four years of absence from the second house as being deemed occupation. However, to claim this extension, X would have to return to the house and live in it as his principal private residence after the period of absence working in London. As a result, this may not be feasible.
For the house occupied by P, the detail regarding the nature of the agreement under which P and the children continue to occupy the house is not clear. However, in such cases it is not uncommon for the ex-partner to be occupying the house under a form of trust. As such, X is deemed to have disposed of the house into the trust when the arrangement was made. But when the property is eventually sold, X as trustee can claim principal private residence relief under section 225, Taxation of Chargeable Gains Act 1992 because his ex-partner as a beneficiary of the trust had been permitted to occupy the house as her main residence.
In order for the querist to give clearer advice to his client on the tax position for this house, he will have to obtain further details of the arrangements from X or his solicitor. - Hodgy.
Extract from reply by 'Goldstone':
It is possible for home 2 to qualify for the main residence capital gains tax exemption.
Section 223(3)(a), Taxation of Chargeable Gains Act 1992 covers periods of absence from one's main residence, the number of days allowed, which do not have to be continuous, totalling three years over a longer period of time. This absence(s) can be for any reason, with the property even having been let. The occupation of the property as the main residence is, however, essential, at any time, both before and after the initial and final periods of absence or the relief under this heading is lost.
In addition, the Inland Revenue's Capital Gains Manual at paragraph 65043 advises: 'Absence due to place of work or employment' - section 223(3)(c): 'You may allow relief for any periods of absence up to a maximum of four years during which the individual could not live in the dwelling house - because of the situation of his or her place of work …'. Paragraph 65044 says that this exemption also covers the self employed.
However, both the above subsections are dependent on section 223(7), which defines a period of absence during which the individual has no other residence available for relief. Fortunately paragraph CG65048 enables the other residence, in this case home 3, to be ignored:
'A residence occupied under a tenancy or otherwise owned may be eligible for relief. But a residence is not eligible for relief if a nomination has been made under section 222(5)(a) in favour of another residence. So any question of eligibility may be resolved by a timeous nomination in favour of the residence from which the individual is absent …'.
Therefore in respect of home 2 the notice under section 222(5)(a) may be given to the Revenue within two years from November 2001, which was the time that X had more than one residence, even though the capital value of the rented home 3 is negligible. Nevertheless one has to consider the actual status of home 2. Revenue Interpretation R175 covers periods of absence and mentions '… so that the question is whether during the period concerned the property has as a matter of fact been a residence'.
