HMRC has produced an online tutorial which is aimed at individual landlords of residential properties. Unfortunately HMRC forgot to get the tutorial technically checked before it was released. One glaring error has been found, and the advice is less than clear.
The error concerns private residence relief, which exempts the taxpayer’s home from capital gains tax (CGT), but only if the property has been the taxpayer’s only or main residence at some point during the taxpayer’s ownership. The tutorial says that the final three years (36 months) of ownership always qualify for private residence relief. In fact if the disposal is made on and after 6 April 2014, only the last 18 months of ownership will normally qualify for private residence relief. This change from 36 to 18 months is being brought in by Finance Bill 2014.
The 36-month CGT exempt period has been retained where the taxpayer or their spouse/civil-partner has moved into a residential care-home or is disabled. However, this 36-month period only applies if taxpayer does not own another property which was capable of qualifying for private residence relief, whether or not that second property was ever actually subject to that relief.
This means that anyone with two homes will only get the 18-month exemption, even if the care-home or disability conditions are satisfied. Also the order of sale of the properties needs to be carefully considered when the owner has moved into residential care.
Say the individual has moved into a care home while he owns a holiday home (A) which has not been subject to a main residence election, and a main residence (B). If B is sold first, only the last 18 months will qualify for the exemption as property A is retained which could have been (but was not actually) subject to the election for the private residence relief. When A is sold later it attracts no CGT exemption as it has never been the main home by fact or election.
If property A is sold first and then B later the CGT exemption will apply to the last 36 months of the ownership of B, because it was the main home, and at the time of the sale the taxpayer owned just one property.