Generally speaking, an individual’s ‘sole or main residence’ is exempt from capital gains tax. If a house, etc., was the individual’s ‘sole or main residence’ for only part of his or her period of ownership, then a time apportionment calculation is made.
However, under a rule dating back to the introduction of the tax nearly fifty years ago, the last three years of ownership qualify for exemption, whether or not the owner was in residence for that period. This is designed to prevent a tax charge arising if, for example, the old house proves difficult to sell or the new requires renovation before the owner can move in.
In his Autumn Statement, the Chancellor announced that, from 6 April 2014, this three-year period of grace will be shortened to eighteen months ‘to make the tax system fairer by reducing the incentive for those with more than one property to exploit the rules.’ The eighteen month rule will apply wherever contracts for the sale of the house, etc., are exchanged on or after 6 April 2014, except that the three year rule will continue to apply, subject to stringent conditions, where the home owner is disabled or has moved into long-term residential care.
What this means in practical terms is that if you have moved houses within the last three years but have been unable to sell it due to the poor housing market then there may be a capital gains tax issue lurking if you dispose of it after the 5 April. If you have moved and are now in the process of selling your old home now and you think you might be affected by this change then we suggest you try and get the sale concluded before the start of the new tax year.
Given the state of the housing market in the North East and Scottish Borders this change may well catch people out as they are forced to move to follow the jobs.