Capital gains – reduction of exemption period

Graham Chase, Tax Partner, CMS

The Autumn Statement simply states in the context of private residence relief that the final period for exemption will be reduced from 36 months to 18 months from April 2014.

To recap – full exemption is available if a dwelling house has been an individual’s only or main residence throughout their period of ownership. Partial exemption applies if the dwelling has been so used for part only of the ownership period, but subject to a valuable deeming whereby the last 36 months of ownership is included as qualifying ownership in any event.

The inclusionary period allows for an “old” home to be sold after the “new” home is acquired and used. The 36 month rule is generous and it opens up tax planning opportunities, often referred to as “flipping”. It allows an indivual to go from one exempt home to another, whilst combining successive ownership with rental income for no more than the appropriate period to maximise exemption. It cannot be surprising that the inclusionary period is being reduced.

We await the draft legislation and hence the detail. The rule may simply be that a disposal on or before 5 April 2014 benefits from a 36 month inclusionary period whilst a disposal on or after 6 Apil 2014 benefits only from a 18 month period. If so then for some property owners early marketing and sale should be considered to maximise the benefit whilst it is available. The normal rule is that the contract date fixes the time of disposal (a conditional contract, for example a sale subject to planning, would not involve a disposal until the condition is satisfied), so a contract with an extended period between exchange and completion may absorb some of the pressure otherwise applicable to an early sale.


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