Main residence relief to change

If you own more than one home, consider whether you should try to take advantage of the window of opportunity before capital gains tax rule changes bite. 

Ordinarily, if you own a property and it is your main residence throughout the period of ownership, capital gains tax is not payable. If you own a property but it is not your main residence for the entire period of ownership, partial relief is available for periods which are deemed to be periods of residence. This includes the final 36 month period of ownership which has, in the past, allowed individuals to move home before selling their previous home, and still claim full relief. It is this final period which the Government is now proposing to change, and which could result in reduced relief from capital gains tax for many.

The proposal

The nub of the problem is that the rules are open to manipulation; individuals can reduce capital gains on second (or more) homes by swapping their main residence by way of a ‘main residence election’ and potentially benefitting from the final three year period of exemption on all properties. The Government is keen to reduce the owner’s ability to manipulate the rules and is therefore reducing the final period of deemed residence from 36 to 18 months. The new rules will apply to property sales which have an exchange date on or after 6 April 2014, but not where contracts are exchanged before 6 April 2014 and completed on or before 5 April 2015.

Individuals affected

The proposals are aimed at wealthy individuals who own multiple properties which have each been occupied as their main residence at some point during their period of ownership, and who make elections to use the exemption to significantly reduce their capital gains tax liability. But, the proposals will catch a wider range of individuals as it will also affect those who are genuinely struggling to sell their previous home, despite the positive rise in the housing market. Individuals who may have moved house, but retained their previous home to be rented out until such time as the property market is buoyant may be affected and hence, may wish to consider selling the rented property sooner rather than later.


There is an exception from this change for individuals who are disabled or who are selling their home to go into care. They will be able to continue to benefit from the current 36 month deemed residence period.

Food for thought

To establish whether you could still benefit from the last 36 months ‘exemption’ or take advantage of other deemed periods of residence that are available, you may need to plan now, before 6 April 2014.

For those who qualify for the last 36 months ‘exemption’ (because the property is the subject of an election, or because it would be regarded by HMRC as their main residence as a matter of fact, or because it is their only property), a number of potential planning options are based around the timing of the property sale. For example, if you are in the process of selling a property which has previously been your main home, but have not been living in the property throughout the entire period of ownership, you can aim to exchange contracts before 6 April 2014 with a view to complete before 5 April 2015. In doing so, you will still benefit from the 36 month exemption.

In some circumstances you may wish to use planning based around contract law, but specialist advice would need to be taken as this is a complex area. You may also wish to explore whether or not an election is appropriate on a particular property to optimise your overall tax position, again depending on the circumstances.

There are other deemed periods of residence that, when available, can provide other planning options. Professional advice should be sought to establish how the options might fit your specific circumstances and to explore if and how your potential capital gains tax liability may be reduced.

If you have property that will be affected by the Government’s rule change, please contact Karen Clarkor your usual RSM adviser.