An article in the Daily Telegraph recently suggested that the proposed new additional Inheritance tax allowance of £175,000 for the family home might cause policymakers to review the existence of the other major tax break currently attaching to properties: the Capital Gains tax (CGT) main residence exemption.
At present when someone sells a property which is their only or main residence then, unlike on the realisation of many other assets, a charge to CGT does not arise because of a specific exemption within the Taxation of Chargeable Gains Act 1992. The operation of the exemption is not always straightforward and the tax tribunals frequently deal with disputes between taxpayers and HMRC over elements of the exemption, such as, whether the taxpayer has actually occupied the property in question.
Occasionally the exemption causes controversy. One issue that hit the headlines during the row over MPs’ expenses, was the ability for taxpayers to elect which of several properties owned by them was their only or main residence and therefore exempt from CGT. Some MPs (and indeed other taxpayers), who owned properties in their constituencies and in London, used the legislation to make opportune switches of their election, saving CGT on the eventual disposal of both properties. Following the expenses row it was suggested that the Government’s review of non-residents and payment of CGT might result in the withdrawal of the ability to make the election, but it does not appear that this will now happen.
The CGT main residence exemption is therefore not without its difficult aspects but it is undoubtedly a valuable exemption for everyone who owns a property. In the Telegraph article it was suggested that, because the value of property now varies so considerably across the country, this might mean that the exemption is capped, presumably with those making the largest gains paying a certain amount of CGT.
The article mentions the undersupply of property leading to ever-increasing prices but it is hard to see how any cap of the CGT main residence relief will curb this problem. Indeed it might make it worse. There is no CGT on death and on death an individual’s assets are revalued to the value applicable at the date of death, meaning that any gains up to that point are wiped out. If there were to be a cap on the main residence CGT exemption then this, together with the proposed additional IHT relief for family homes, would doubtless result in home owners sitting on properties with large gains attaching to them until their deaths to obtain a CGT free disposal by their heirs and the benefit of the proposed new IHT exemption.
We will await events to see whether the Telegraph’s prediction proves to be an accurate one.