HMRC’s attitude to capital gains tax and residential property is changing and this change could potentially affect many home owners.
Currently an individual’s main residence is exempt from capital gains tax due to the generous main residence exemption commonly referred to as Principle Private Residence relief (PPR).
In most domestic property sales the relief will cover the entire capital gain on sale. If you own only one property which you have lived in throughout the period you have owned it then you will almost certainly qualify in full for PPR.
If you own more than one property or expect your period of ownership to be short or there have been periods of non-occupation then the situation is more complicated. PPR may only be partially available or in some cases not at all and you will need to plan carefully to maximise your chances of making a successful claim.
In the past HMRC has taken a light touch in deciding what constitutes a main residence for the purpose of PPR, often accepting that a property has been the main residence even when the actual periods of occupation or ownership have been short or where an intention to develop was apparent.
A number of recent tax cases have challenged the status quo with HMRC successfully seeking to deny PPR. The cases have generally focused on the intention to occupy as a main residence and the quality of occupation. Deciding factors have included property being actively marketed for sale throughout the period of occupation and living on site during development not being a sufficient quality of occupation.
I am often asked how long it is necessary to live in a property for it to qualify for main residence exemption, but it is clear from HMRC guidance and the case law that, as with many things in life, quality of occupation rather than quantity is the most important factor. Taking steps to ensure that post is directed to your property, that you appear on the electoral register, registering with a local doctor and actually moving your furniture in are more likely to lead to a successful claim than physically camping out at the property for any length of time.
Where PPR is due in full on a sale then it applies automatically and does not need to be claimed. This leads to most sales of domestic property not being declared at all on a self-assessment tax return. However, problems will arise for anyone failing to declare a sale in the mistaken belief that PPR will cover the whole of their gain when it is only partially due or not due at all.
HMRC can and do obtain details of all property sales in the UK from the Land Registry and are on the look out for undeclared gains. Should HMRC successfully challenge a claim to PPR then tax, interest and penalties will all become payable. It is therefore important that if you are in any doubt over the validity or quantum of your claim then full disclosure of the facts should be made.