The family home can give rise to various tax issues. For example, an income tax liability can arise if rental income is received in respect of it (subject to possible ‘rent-a-room relief’ of up to £4,250 a year in 2003/04, for individuals who let furnished accommodation in their only or main residence).

In addition, the family home often represents the single largest asset in an individual’s estate, and the spiralling increase in house values can result in the family home alone being worth more than the owner’s inheritance tax ‘nil rate’ band (£63,000 for 2004/05).

For capital gains tax (CGT) purposes, the gain (or loss) on disposal of an individual’s only or main residence (in the UK or abroad) may be wholly or partly exempt. A gain is completely exempt if the property has been the individual’s only or main residence throughout the period of ownership (or since 31 March 1982, if shorter). This guide considers circumstances in which a gain on disposal of the family home may not be wholly exempt from CGT.

1. When can a gain on disposal of the family home be only partly exempt?
   
   A gain on the disposal of an individual's only or main residence can be only partly exempt where:
   
   1. 2 or more residences are owned, both of which have been the individual's main residence at different times; or
   2. The owner was absent from the residence for a period of time; or
   3. The property was partly let; or
   4. The property was partly used exclusively for business purposes; or
   5. The garden is sold after the residence.
      
2. Does the CGT exemption extend to the entire garden?
   
   Not always. The relief covers the residence itself, together with its garden or grounds up to half a hectare (approximately 1 1/4 acres). A larger area of land may be exempt depending upon the size and character of the residence, where that land is considered necessary for the reasonable enjoyment of the residence.
   
   Larger residences (i.e. with grounds exceeding the above limit) often comprise several separate buildings. If they are in reasonably close proximity to each other, and are capable of being regarded as a single residence (e.g. a house and a garage, or a property with a horse stable), the relief can be extended to include some or all of those buildings.
   
   Part of the garden or grounds is often sold separately from the residence itself. If the garden disposal takes place before the residence is sold the gain should be exempt, if the size of the garden was within permitted limits. However, no relief is available if the garden is sold after the residence.
   
3. Does absence from the property affect the relief?
   
   Periods of absence (since 31 March 1982) in excess of certain permitted limits are treated as chargeable parts of the overall gain on disposal of the residence. The following periods of absence are treated as periods of occupation, and are therefore exempt from CGT:
   
   1. The last 3 years of ownership (whether living there or not), if the property has been the individual's only or main residence at some time during the period of ownership;
   2. Up to a year before taking up residence (or 2 years in exceptional cases), e.g. where there is a delay in disposing of the previous residence;
   3. Up to 3 years for any reason (this period need not be consecutive)
   4. Any absence during which the individual is employed abroad; and
   5. Up to 4 years where the individual is prevented from living at home due to distance from work, or because his employer requires him to live elsewhere.
      

   To qualify for relief under the last 3 categories, the absence must be preceded and followed by a time when it was occupied as the individual’s only or main residence, and throughout the absence there must be no other residence eligible for relief. However, periods of absence under the latter two categories do not require a later period of actual residence if the individual cannot resume residence because his employment requires him to work elsewhere. Periods in excess of the permitted limits are taken into account as non-exempt periods of absence.
   

4. What if two or more residences are owned at the same time?
   
   An individual with 2 (or more) residences may elect which is to be his exempt residence for CGT purposes. The property chosen need not actually be his main residence, although it must nevertheless be a residence, as opposed to an investment property. The time limit for making an election to the Inland Revenue is two years from the date on which the latest residence is acquired (extended by Revenue concession in some cases).
   
   If no election is made, the Inland Revenue may decide as a question of fact which property is the individual’s main residence. Husbands and wives who live together can have only one main residence between them. The main residence election must therefore be made jointly.
   
   If a property is owned on 5 April 1988 which has since been continuously occupied rent free by a dependent relative as his or her sole residence, any gain on the property is exempt from CGT upon disposal.
   
5. Can the election as to which property is the main residence subsequently be varied or changed?
   
   Yes, and in some cases doing so can work to the taxpayer’s advantage. A change in the election of exempt home must be notified to the Inland Revenue, and is effective for a period of up to 2 years prior to that notification. This can be useful if two houses have been owned for a number of years, and one property is subsequently sold at a gain. If residence relief for the last 3 years’ ownership is not available on that property (i.e. because it has never been the taxpayer’s main residence) an election may help to secure it.
   
6. What is the position for individuals who have to live away from home for work reasons?
   
   Where an individual resides in job–related accommodation and owns a house which he intends in due course to occupy as his only or main residence, the period during which the job–related accommodation is occupied is generally treated as though it were occupation of the residence he owns for relief purposes. If the intention to live in the house continues until it is sold, relief continues to be available, even if it was never actually lived in.
   
7. What if all or part of the residence is let?
   
   A further CGT exemption on the disposal of an individual’s only or main residence can apply if the relief would otherwise be restricted because the owner let all or part of the property as residential accommodation.
   
   The gain attributable to letting, which would otherwise be chargeable to CGT, is reduced by the lower of:
   
   1. an amount equal to the exempt gain (due to the owner's occupation); and
   2. £40,000.

   
   However, the normal private residence exemption is available if a single lodger lives in the property as part of the owner’s family.
   

8. Can 'residences' be bought, lived in for a short time, and then sold to make an exempt gain?
   
   One of the conditions for obtaining CGT relief is that the house must be acquired for the purposes of residing in it. The exemption is lost if the property was acquired for the primary purpose of making a speculative gain upon its disposal.
   
   Alternatively, if the house was not acquired for that purpose but subsequent expenditure on developing the property was wholly or partly for the purpose of making a gain on disposal of the property, no CGT relief is due on the proportion of the gain relating to that expenditure.
   
   Worse still, the Inland Revenue could argue that a ‘trade’ of buying and selling properties is being carried on (particularly if those properties have been renovated), which may mean that the ‘profit’ on disposal is taxed as income. So beware!
   
9. What happens if the residence is used for business purposes?
   
   If part of the residence is used exclusively for business purposes, exemption from CGT (including the exemption for the last three years of ownership) does not apply to the business proportion of the gain. However, business asset taper relief may be available on that business element.
   
   The residence exemption is unaffected if no part of the home is used exclusively for business purposes.
   
10. Is the relief only available to individuals?
    
    No, the exemption may be available on the disposal of a residence owned by settlement trustees and occupied by a beneficiary who is entitled to occupy that property under the terms of the trust. The relief may also be available upon the disposal of a residence by a deceased individual’s personal representatives. However, the relief is not available to companies.