Your home and the capital gains tax exemption

Your main home is usually exempt from capital gains tax. You will see under our article “Owning a Second Home” that the exemption can in some circumstances also apply to a second residence. But what qualifies as your home? The Tax Tribunal has considered this recently in the case of Springthorpe v Revenue and Customs.

The appellant had purchased a property in November 1999. Between November and the following July he lived in the property whilst substantial renovations were carried out. For that period the utility bills were very low and the Council gave a tax exemption certificate on the grounds that the property was uninhabitable. The appellant then let the property to students from July 2000 until September 2005 and the property was then sold. He claimed principal private residence exemption from capital gains tax for the period when he had lived there as well as the last three years, and also the letting's relief which applies when a property has at some time been occupied as a residence. HM Revenue rejected the claim and the taxpayer appealed.

At the Tax Tribunal hearing the taxpayer produced evidence in the form of three letters from a neighbour, a builder and an estate agent, which confirmed that he had lived in the property. However the Tribunal concluded that in order to satisfy the requirements for exemption the occupation of a property had to have some degree of permanence, and some degree of continuity or expectation of continuity. The test was a qualitative test, and was not solely based on occupying a property for a given period of time. They found that the letters from the third parties did not address the quality of the taxpayers occupation, and nor was any great importance attached to the council tax exemption. But to the extent that the taxpayer had lived in the property they found that he did so in order to carry out the renovation and not to occupy it as his home. Thus the quality of his occupation and his intentions did not satisfy the test laid down in the Taxes Acts and the appeal would be dismissed.

Whilst the low utility bills and council tax exemption were not key factors in reaching this particular decision, if the Council tax had been paid and utility bills were at the normal level it would have been a strong indication that the property was being occupied as a home.

Other factors

There is a limit on the permitted area which qualifies for exemption which is defined as 0.5 hectares (roughly 5000 sq. metres) OR a larger area if required for the reasonable enjoyment of the property having regard to its size and character.

The private "residence" may include other buildings within the curtilage of the main property, which are close to and occupied for the purpose of the building occupied by the taxpayer.

Sale of a Garden

Bear in mind that if you divide your interest in a property, perhaps by selling only a part of it, the exemption will apply to the property which is occupied as your main residence at the date of sale. You should take advice if you are considering this type of transaction. With careful timing it may be possible to retain exemption from capital gains tax for the whole property.

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