Inheritance tax The general growth in house prices has caused real IHT worries because retaining the family home in the estate when it is often the largest asset could result in an IHT liability of up to 40%. At the same time, finding a way to deal with it efficiently for IHT is difficult because individuals need a place to live. See ‘preserving the inheritance’ for further details.
The £7,500 limit is a maximum which can apply to either a property or a person, so if two individuals jointly own a property and take in a lodger, they must share the limit at £3,750 each. Capital gains Having a single lodger sharing the use of facilities such as the kitchen should not impact a taxpayer’s ability to claim private residence relief (below). Main residence - other considerations An individual’s or married couple’s only or main residence is generally exempt from CGT under a relief known as private residence relief. The exemption extends to grounds of up to half a hectare provided this is not used for any other purpose. Tax Planning Larger grounds may also be exempt, as can the sale of part of the garden or grounds for development. However, professional advice is recommended to plan for the best outcome. There must also be clear evidence of occupation as a main residence and not just ownership. Certain periods of absence from the property can be deemed to be periods of occupation and as such, can count towards the exemption from CGT. The exemption from CGT only applies where the whole property is occupied. Apportionment may be required where part of the property is used for business purposes or is let out with resulting gains being potentially taxable.
Letting relief may apply where you have multiple lodgers or let out part of your home. We would be happy to discuss your specific circumstances with you. More than one residence Where an individual (or married couple) has two or more residences, only one residence at any one time can be treated as the main home for exemption. This is done by an election. Provided a particular residence has been the main residence at some time, then generally the last nine months of ownership is exempt. This applies even if another residence has become the main residence during this time. Example Joe’s house in Luton is his private residence, which he has owned for eight years. Fed up with commuting, he buys a flat in central London and elects for this to be his main residence. Exactly five years later he sells his home in Luton. The Luton home is exempt for the first eight years whilst he was living in it and for the last nine months because, even though he had another home which was his main residence during this time, the last nine months is always exempt provided the home in question qualified as the main residence at some point. 8.75/13 of the gain on the Luton home will be exempt from CGT. Upon the eventual sale of the flat the whole of that gain will also be exempt.
The main residence exemption can be complex. Please contact us for further advice before making transactions in property.
Property Matters
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