•      Given that their house is by far the most valuable asset that most people ever own, and that the long-term trend in UK property values has been significantly upward, this exemption is for many people the single most important element of UK tax legislation. Planning for best use of the exemption can therefore be vital

Permitted area

•      Exemption applies (in whole or part) to a dwelling-house which has been, at any stage in the taxpayer’s period of ownership, his or her only or main residence

•      It also applies to land used as garden or grounds up to ‘the permitted area’

•      The permitted area (which includes the house itself) is 0.5 hectares, or such larger area as is required for the reasonable enjoyment of the house having regard to its size and character

Permitted area and subsidiary buildings

•      Given the subjective nature of the test, cases where the site of the residence exceeds 0.5 hectares often give rise to disputes. This is particularly the case where there are buildings other than the main house on the site. In such cases those buildings will only be eligible for exemption where they increase the enjoyment of the main dwelling house and are ‘very closely adjacent’ to that house

What is ‘residence’?

•      Residence in a particular property is a question of fact. There is no minimum period specified; quality rather than length of occupation is the decisive factor.

•      Thus if you wish to establish that you have resided in a property, take steps to confirm it as your main residence. Join the electoral roll at that address, ensure you pay full council tax on it and inform HMRC and others that it is your postal address.

More than one residence

•      A taxpayer can only have one residence at any one time

•      A husband and wife may only have one residence between them unless and until they permanently separate

•      Which property is the main residence at any one time is a question of fact

•      A taxpayer may, however, determine which of two or more residences is the main residence by election, subject to certain time limits

Main residence elections

•      An election to determine main residence must be made within 2 years of the first occupation of the second property as a residence

•      The election may then be varied at any time, with retrospective effect for up to 2 years if desired

•      The acquisition or occupation of a new residence opens up a new 2 year ‘window’ for a further election to be made

•      Any property elected as a main residence must be occupied as a residence for the election to be valid

Periods of absence

•      Certain periods of absence can be regarded as periods of occupation for the purposes of the exemption where there is no other property eligible for main residence exemption and where the property is re-occupied as the main residence after the absence (unless the requirements of work prevented the taxpayer from so doing)

o    A period of absence, for any reason, not exceeding 3 years

o    Any period of absence working in an employment outside the UK

o    A period of absence of up to 4 years due to a requirement to work elsewhere in the UK, applying either to the taxpayer or his/her spouse

Delay in taking up residence

•      HMRC will allow a one year delay in taking up residence as being part of the period of residence where the property is being built or altered during that period, or where the previous residence is being disposed of.

•      If good reason can be shown by the taxpayer the 1 year period can be extended to a maximum of 2 years by HMRC


Business use

•      If any part of the property is used wholly for non-residential purposes, the relevant proportion of the gain on sale is ineligible for exemption. Thus it is not advisable to use any part of your main residence 100% for business purposes; you should always ensure that there is some private use, however minimal

Job-related accommodation

•      Where a taxpayer occupies job-related accommodation and owns a house which he/she intends to occupy as a main residence in due course, that house is eligible for main residence exemption during the period of occupation of the job-related accommodation. Evidence of intention to occupy is vital in case the intention is not fulfilled for any reason

•      Living accommodation is job-related where:

o    It is necessary for the proper performance of the employee’s duties that he/she resides therein; or

o    The provision of accommodation is customary and it is provided for the better performance of the employee’s duties; or

o    The accommodation is provided as part of security arrangements to meet a special threat to the employee’s security (this used to apply, for instance, to Secretaries of State for Northern Ireland during the troubles in that country)

•      The ‘proper’ and ‘better’ performance exemptions do not apply to accommodation provided by a company to its directors

•      Accommodation is also job-related if a taxpayer is trading and is bound under an arm’s-length contract to live there (e.g. the tenant of a public house)

•      This does not apply if the accommodation is provided by a company of which the taxpayer is a director or by business partners of the taxpayer 

Last 36 months of ownership

•      Where a property has been, at any point during the period of ownership, the taxpayer’s main residence, the last 36 months of ownership are deemed for tax purposes to have been a period during which the property was occupied as a main residence. This does not impact upon the tax status of any other residence owned and/or occupied during that period

Proportionate exemption

•      Where there is some period outside the last 3 years of ownership when a residence was not treated as the taxpayer’s main residence, a proportion of the gain will be taxed and a proportion will be exempt.

•      The apportionment is made on a strict time basis, and without regard to the value of the property at any point other than the date of acquisition and the date of disposal

Dependent relative relief

•      Where a property owned by a taxpayer was occupied by a ‘dependent relative’ prior to 6 April 1988, it is treated as the main residence of the taxpayer for the period of that occupation

•      Only one property per taxpayer or married couple is eligible for this relief at any one time

•      If the dependent relative permanently moves elsewhere, the period of occupation ends, even if the relative reoccupies the property at a later date

•      The property must be provided rent-free and with no other consideration, although the relative can pay council tax and repair bills on the property

•      A dependent relative is either:

o    A relative incapacitated by old age or infirmity from maintaining him or herself; or

o    The mother of the taxpayer who is widowed, separated or a single woman in consequence of dissolution or annulment of marriage

•      Relative is widely defined for this purpose

•      Old age is regarded by HMRC as meaning 65

•      A person is infirm if prevented from working by physical or mental illness


•      Where the beneficiary of a trust is entitled to, and does, occupy a property owned by the trustees as his/her main residence, the trustees are eligible for main residence exemption on that property.

•      Such entitlement can arise where trustees of a discretionary trust exercise their discretion to allow a beneficiary to occupy a property

Letting relief

•      Where a property partly eligible for main residence exemption has been let as residential accommodation during the period of ownership, letting relief will be available

•      Letting relief is the lesser of:

o    £40,000; and

o    The gain exempt under the main residence provisions

•      Husband and wife are each entitled to this relief for jointly-owned property


Gains excluded from exemption

•      Where a property has been acquired wholly or partly for the purpose of realising a gain on disposal, main residence exemption will not apply

•      If the taxpayer has acquired the property by a gift subject to capital gains tax holdover election, he/she cannot claim main residence exemption in respect of the property

Summary & conclusion

•      There can thus be much to gain from planning for the main residence exemption. If you wish to discuss your main residence options, please contact Mark Simpson:


•      Telephone     0161 886 8062

•      E-mail