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Everyone knows that capital gains made on a sale of your “only or main residence” are exempt from capital gains tax (CGT), but it is not always appreciated that this also means that if you sell at a loss, that loss is not available to deduct against other capital gains.
Is there anything to be done about this?
Was it really your “main residence”?
If you have more than one residence, you may have taken the opportunity to “flip” one of them for tax purposes.
“Flipping” involves electing for one residence to be treated as your main residence for a short period and then “flipping” back to the other residence. The purpose is to secure the exemption for the last three years of ownership that applies to a property if it has been your main residence even for a short time.
If the property you are selling at a loss is the one you “flipped”, and the short period for which you nominated it as your main residence began less than two years ago, you can amend your election to remove the exemption and thus claim the loss.
Was it always your main residence?
If you let the property out for part of your period of ownership, then a part of the gain (or loss) attributable to that period will not be exempt. Capital gains are deemed to accrue on a “straight line” basis, so if you sell a property you have owned for ten years, making a loss of £100,000, and you let the property out for the first three years you owned it, then three tenths of the loss, or £30,000, will be allowable to set against other capital gains of the same or future tax years – and if you do not normally complete a self assessment each year, you should do so in order to claim this loss.
If the letting occurred in the final three years of ownership, however, the loss will not be allowable because of the exemption for the final three years of ownership referred to above.
If you did not let the property but were simply absent from it for a period, you should take advice from a tax adviser, as the rules for absences from a main residence are extremely complicated.
Was it owned by a Trust?
The main residence exemption applies to trusts if the property was occupied as a main residence under the terms of the Trust document, but crucially it only applies if the trustees make a claim for it. If they sell at a loss, they simply do not make a claim and the loss is allowable against any other gains they may make.
Was it occupied by a “dependant relative”?
This is getting increasingly unlikely, as the dependant relative in question will have had to be in residence before 6 April 1988 when the law was changed, but I last came across it a couple of years ago.
Like the rules for a Trust, the exemption for dependant relatives has to be claimed, so in the case of a sale at a loss, not claiming the exemption will make the loss allowable.
A long shot?
The legislation (TCGA 1992, s 224(3)) denies the main residence exemption in a case where the property was purchased “wholly or partly for the purpose of realising a gain from the disposal of it”, so it seems to me that one could argue that buying with a hope to sell at a profit removes the main residence exemption and makes the loss allowable. It’s a very long shot and I have never seen it tried in practice, but it would be an interesting argument with HMRC!
Practical Tip :
Although every care is take to ensure the information contained within this article is correct it is advisable to take independent tax advice based on your own specific circumstances.