Relief from Capital Gains Tax (CGT) on the sale of a person’s home has been in place since the 1960s. The rules themselves are quite complicated but in broad terms, any capital gain on the sale of a property is relieved in proportion to the time that property has been (or deemed to be) the seller’s only or main residence.
For example, if I have owned a property for 10 years and it was my main residence for five years, then in principle, half of any capital gain would be subject to CGT as I haven’t lived in the property for half the time I owned it.
However, when calculating how long the property has been my only or main residence, I am also deemed to have lived in the property for the last 18 months of ownership, even though I was not necessarily living in the property.
This has historically given taxpayers some comfort that if they were unable to sell their former home immediately, they had a grace period to sell the property before being subject to CGT. Until 2014, that grace period was three years rather than 18 months, and it is now proposed to reduce further to nine months.
For those undertaking self-build projects, it could have unfair consequences as unlike other individuals selling their homes, the property they have bought to replace it is a building site and could remain uninhabitable well after the 9-month grace period. Self-builders might therefore suffer CGT on the sale of their old property unless they can complete the build in nine months or sell their old place and make the move into the dreaded caravan on site.
In fairness, HMRC do already recognise self-builders require special rules and, by concession, individuals can elect to treat their building site as their main residence. Typically, provided the build was moved into within a year (or in exceptional circumstances within two years) then that initial ownership of the new property may qualify as an individual’s Principal Private Residence (PPR).
Also, the consultation is not all bad news as it proposes turning the above concession for self-builders into law. This might be a response to the recent case G & M McHugh v HMRC which highlighted the absurdity of the concession. In the past, it was interpreted to mean someone taking 364 days to build their house could benefit from the concession whereas someone taking 366 days couldn’t. It led the judge in that case to take the view that HMRC’s long-standing published guidance on the matter was ‘simply wrong’ and granted the taxpayer relief. Hopefully if the concession is written up it will provide further helpful clarity.
It will be interesting to see HMRC’s response to the consultation process and whether further amendments might be introduced to take account of individuals unfairly impacted by the nine-month grace period, perhaps by including a discretionary power to extend it. In the meantime, ‘Grand Designers’ might want to dust off the camping stove if they want to avoid an unwelcome tax bill on the sale of their old house.