Downsizing the family home to reduce my inheritance tax bill
QUESTION: We moved out of our family home recently following our retirement. One of our children has agreed to buy it from us. Will we have to pay tax on the sale of this house even though we lived in it for 20 years?
ANSWER: The capital gains tax (CGT) exemption for gains made on the sale of your home is one of the most valuable reliefs from which many people benefit during their lifetime. The relief, known as Principal Private Residence Relief, exempts the gain on the sale of any property that has been your main residence.
Only a property occupied as a residence can qualify for the exemption. An investment property in which you have never lived would not qualify. The term ‘residence' can include outbuildings separate from the main property but this is a difficult area. ‘Occupying' as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to work.
The exemption includes land that is for ‘occupation and enjoyment with the residence as its garden or grounds up to the permitted area'. The permitted area is half a hectare including the site of the property which equates to about 1.25 acres. Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it.
It is increasingly common for people to own more than one residence. However an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple (or civil partnership), there can only be one main residence for both. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although there are additional restrictions from April 2015.
The election must normally be made within two years of the change in the number of residences.
Furthermore, there is a further rule that allows CGT exemption for the last 18 months of ownership (36 months prior to 6 April 2014) of a property that has at some time been the main residence. Where the owner of the property is in long term care or a disabled person, and meets the necessary conditions, they continue to benefit from a 36 month exemption.
From 6 April 2015 a person's residence will not be eligible for Principal Private Residence (PPR) relief for a tax year unless either:
• the person making the disposal was resident in the same country as the property for that tax year, or
• the person spent at least 90 midnights in that property.
The rules apply to both a UK resident disposing of a residence in another country and a non-resident disposing of a UK residence.
A further relief is given if your main residence has been let as residential accommodation during the period of ownership. The letting exemption can be very valuable but is only available on a property that has been your main residence. It is not available on a ‘buy to let' property in which you never live.
Feargal McCormack (email@example.com) is managing partner of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept liability for any direct or indirect loss arising reliance placed on replies.