A little knowledge is a good thing

With seasonal change in mind (notably the end of the tax year) this month's Lead Taker takes a look at some of the generic issues relating to Capital Gains Tax (CGT) and residential property.

Firstly, it has to be said that we are not accountants, nor should we aim to be, but at the same time, the person with that extra bit of useful knowledge is likely to win the customer.


So to begin, UK house prices should embark on some sort of recovery in 2013, if only because of shortage of supply.

Planning applications for new housing developments in England have halved over the last four years and after flat-lining this year, the Office for Budget Responsibility is expecting the value of the average dwelling to leap 1.9 per cent in 2013; 4.3 per cent in 2014; 4.5 per cent in 2015 and 4.5 per cent in 2016.

Imagine that, homeowners sitting back and relaxing whilst watching the capital in their homes increase, and on this wave of optimism I am highlighting how best to preserve the equity accrued in a home, as a tax-free gain.

First off, a property must be used as the owner's residence to qualify for CGT exemption and while there is no stated minimum length of occupation, evidence supporting its use as a home may be required.

Utility bills and insurance documentation are useful in this respect, although gas and electricity bills will need to reflect seasonal norms to avoid a challenge from HMRC.

While it is common for people to own more than one residence, an individual can only benefit from CGT exemption on one home at a time, and in the case of a married couple or civil partners, there can only be one main residence for both.

Where a couple or individual owns two or more residences they can choose which should benefit from CGT exemption on sale, but the selection normally needs to be made within two years of acquiring a second residence.

In addition, CGT exemption may be allowed for the last three years of ownership of a property that has at some time been the main residence.

Relief may also be given if a main residence has been let during the period of ownership, but to qualify the property must have been the owner's main residence at some point.

There is no CGT relief on a buy-to-let investment property, but a top tip for a couple getting together in a main residence and keeping one as a buy-to-let is to have a valuation of the property being let.

HMRC will apportion CGT from the time it becomes a rental property until the point at which it is sold or re-occupied as the main residence.

Of course, HMRC's apportionment may be favourable but the Revenue's valuations tend to be generic and may not take account of local conditions.

As you can't get the property valued retrospectively, it is worthwhile commissioning a condition and valuation survey prior to the arrival of the first tenant, as this will prove invaluable if you need to argue your case some years down the line.

Additionally, the survey will need to be carried out by an FRICS or ARICS, not by some local sales agent.

Turning to the sale of land that forms part of a property, exemption is allowed for land that is for the "occupation and enjoyment with the residence as its garden or grounds up to the permitted area".

Currently, the permitted area, including the land on which the house sits, is half a hectare, or about 1.25 acres.

In other words, homeowners with land to sell should strike lucky with CGT exemption if they continue to own the property and its remaining plot, but only if the original plot was within the half a hectare limit.

Where a sale of land exceeds half a hectare, the vendor needs to be able to demonstrate that despite being sold, the land was needed for the reasonable enjoyment of the property - and it's difficult to imagine what circumstances would fit that bill.

Larger grounds can sometimes qualify but only if they fit with the size and character of the dwelling and are required for the reasonable enjoyment of it.

However, a homeowner's view of what is needed for "enjoyment" of a property is likely to be challenged if it involves enough hectares to put a Sherman tank through its paces, by way of a Sunday morning pass-time.

Hanging onto part of the grounds of a residence when selling a home does not mean CGT relief will be triggered when eventually the land is sold on, as the plot no longer forms part of the vendor's main residence.

Also of note, a large amount of land (four acres and above) attached to a property is likely to present a challenge for lenders i.e. if they have to repossess, land management issues may arise.

For those working from home, CGT exemption on sale may be denied to an extent, where part of a property is used exclusively for business. Where business use is not exclusive, there is no problem with CGT exemption.

However, where a sale is linked to the purchase of a new property which will be used in part for business, the business use element of the original gain can, in some circumstances, be "rolled over" against the cost of the new property.

Finally, CGT exemption is available where a property is owned by trustees and occupied by one of the beneficiaries as their main residence.


Well, here's to the recovery of the UK's beleaguered housing market and in the meantime, I hope my promotion of a little market knowledge is useful, particularly with taxation high on the agenda as we head towards April.

In signing off, a quotation comes to mind: "In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin (1706-90).