CGT main residence relief

By | 8 April 2013

An individual who is fortunate enough to have more than one residence may well find a main residence election useful in terms of optimising private residence relief. The legislation concerning the election is contained in TCGA 1992, s 222(5). It states:

“(5) So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period—

(a) the individual may conclude that question by notice to an officer of the Board given within 2 years from the beginning of that period but subject to a right to vary that notice by a further notice to an officer of the Board as respects any period beginning not earlier than 2 years before the giving of the further notice…”


Two key words here are ‘residences’ and ‘main residence’. The fundamental requirement for making the election is that each property must actually be the individual’s residence for private residence relief purposes. There is no statutory definition of the term “residence” in this context, and it is therefore often necessary to refer to case law for guidance. The meaning of residence is beyond the scope of this article, but (for example) in ‘Tolley’s Tax Cases’ there are a number of cases in which courts and tribunals have had to consider whether a property was an individual’s residence or not. In addition, HMRC’s capital gains manual looks at the meaning of ‘residence’ at paragraph CG64420 and following.

In Regan & Anor v Revenue & Customs [2012] UKFTT 569 (TC), the tribunal said on the meaning of ‘residence’:

“We consider that the issue of whether a property is or has been a residence is a matter of fact that should be determined by reference to the quality (and not merely the length) of the occupation.”

Main residence

Once it has been established that there are two or more residences, the election allows the individual to decide conclusively which residence should be treated as the main one. However, in a recent First-tier tribunal case, it appears that HMRC were rather confused about the effect of the election.

In Ellis v HMRC [2013] UKFTT 775 (TC), a property was bought in March 1999 for £100,000, and let out until 31 August 2004. Mrs Ellis and her late husband then decided to use the property as a residence from 1 October 2004, and later that month they submitted a main residence election to HMRC under s 222(5). The property was subsequently sold in April 2005 for £187,500. Private residence relief was claimed on the property, but following HMRC enquiries into the tax returns of both individuals, tax assessments were raised. Those assessments were appealed against, on the basis that the property had been used as a residence, and that the main residence election was conclusive as to which residence amounted to the taxpayers’ main residence.

At the tribunal hearing, HMRC stated that that the point in dispute was whether the individuals’ occupation was sufficient to deem the property as a ‘main residence’ for private residence relief purposes. The HMRC officer accepted that the property was a ‘residence’ of the taxpayers, but argued that the nature and extent of the property’s use did not permit the conclusion that it was their ‘main residence’.

Effect of election

However, the tribunal pointed out that once HMRC had conceded that the property was a residence, and that the taxpayers had two residences, the effect of s 222(5) was to allow the taxpayers to make an election that determined which of the two residences was their main residence for CGT purposes. In other words, HMRC were unable to argue that the residence was not the taxpayers’ main residence. The tribunal judge pointed out that if HMRC’s arguments had been correct, it would have meant that an election under s 222(5) could never be conclusive, and he said that this was contrary to the plain meaning and effect of s 222(5). The appeals were therefore allowed.

It seems rather strange that this case reached the tax tribunal in the first place. After all, it appears to be clear from the wording of s 222(5) that taxpayers can elect conclusively which residence is their main residence for CGT purposes. Presumably, the appellants did not ask HMRC for a statutory review by another HMRC officer, or perhaps were not offered one. It is also interesting that HMRC states the following in its own guidance at CG64485:

“When nominating which residence is to be treated as the main residence, an individual is not obliged to nominate the residence which is factually his or her main residence; they may nominate whichever residence they choose.”

There is no mention in the case transcript of an application being made to the tribunal for the award of costs against HMRC. One can only speculate whether the tribunal would have awarded costs to the taxpayers, on the basis that HMRC had acted unreasonably. It does seem (to me at least) that an award of costs was justified.

Points to note

With regard to main residence elections, the legislation specifies a two-year time limit in s 222(5) for making the election. In HMRC’s view that two-year period broadly starts from when the individual has a new combination of residences. For example, in practice the opportunity for making the election will often be triggered by buying another property and occupying it as a residence. However, the time limit does not necessarily run from the date on which the other property is acquired. The two-year period runs from the date that another property started to be used as a residence.

For example, in the Ellis case, having bought the property in 1999, the couple rented it out until August 2004. They then occupied the property as a residence from 1 October 2004. Thus they would have had until 30 September 2006 to make a main residence election.

As mentioned, HMRC’s position on when the two-year time limit starts is that the main residence election must be made within two years from the date when there is a different combination of residences. This point is set out in the capital gains manual at CG64495. HMRC’s approach has not been universally accepted in the past, but HMRC’s guidance refers to the case Griffin v Craig-Harvey [1993] STC 54 in support of its interpretation of the legislation, in which the High Court reached a broadly similar conclusion.

In terms of the election itself, HMRC lists a number of conditions to be satisfied in order to make a valid election in the capital gains manual at CG64520. For example, HMRC states that an election cannot be signed by the taxpayer’s agent. It must be signed by the taxpayer. In addition, HMRC’s guidance mentions spouses or civil partners who are living together, and refers to the legislation in TCGA 1992, s 222(6), which states that there can only be one residence or main residence for both of them, and that a main residence election affecting both spouses or civil partners must be made in writing and signed by both individuals.


Once an election has been made, it can subsequently be varied by giving notice to HMRC. This variation can be backdated by up to two years from the date on which it is made. In practice, the facility to vary elections is sometimes used for planning purposes to optimise private residence relief. For example, if a property has been the individual’s only or main residence for even a relatively short period of time, on a subsequent disposal of that property it is generally possible to claim CGT relief for up to the last 36 months of ownership, by virtue of s 223(1). HMRC’s capital gains manual at CG64510 famously includes the following example, which suggests that this planning is acceptable to HMRC:

“…where an individual with two residences validly nominates house A, they may vary that nomination to house B at any time. The variation can then be varied back to house A within a short space of time. This will enable the individual to obtain the benefit of the final period exemption on house B with a loss of only a small proportion of relief of on house A.”

HMRC’s example does not indicate how short the length of time can be between variations. It has been suggested by some commentators that a period of one or two weeks may be all that is needed. Of course, there would be a loss of relief on the first property for the same period, although the gain will often be small, and may perhaps be covered by the individual’s annual CGT exemption. Generally speaking, where more than one residence is owned, it will generally be a good idea to make a main residence election, so that it can be varied later, if necessary. A protective main residence election should also be considered whenever there is a change in the residences owned, for the same reason.

Not too late?

Finally, satisfying the two-year time limit for making a main residence election can sometimes cause difficulties, in terms of identifying what constitutes an additional residence. For example, an individual may have a residence in London, but work in Manchester during the week. They may decide to rent a property in Manchester, occupy it from Monday to Friday, and return to London at weekends. HMRC’s view appears to be that if, in this example, the Manchester property is rented under a tenancy it is a residence for private residence relief purposes. However, the individual may not initially realise that they now have two residences for CGT purposes, and could have made a main residence election. By the time that they do realise, the two-year time limit for making the election may have passed.

Fortunately, HMRC recognised this potential difficulty, and introduced extra statutory concession D21, which states:

“Where for any period an individual has, or is treated by the Taxes Acts as having more than one residence, but his interest in each of them, or in each of them except one, is such as to have no more than a negligible capital value on the open market (eg a weekly rented flat, or accommodation provided by an employer) the two year time limit laid down by TCGA 1992 s 222(5)(a) for nominating one of those residences as the individual’s main residence for capital gains tax purposes will be extended where the individual was unaware that such a nomination could be made. In such cases the nomination may be made within a reasonable time of the individual first becoming aware of the possibility of making a nomination, and it will be regarded as effective from the date on which the individual first had more than one residence.”

The concession broadly allows the two-year time limit for making a main residence election to be extended to within a reasonable time of the individual first becoming aware of the possibility of making the election. However, note that there is an important condition for this concession to apply, which is broadly that one of the residences must have no more than a negligible capital value on the open market, such as a weekly rented flat or accommodation provided by the employer. It does seem a little strange that a main residence election may be relevant in respect of rented property, particularly if it has little or no capital value. Nevertheless, that appears to be the case. However, since 16 October 1994, the election has not applied to properties occupied under a licence, such as where an individual stays with friends at their house, for example.

The above article is reproduced from ‘Practice Update’ (April/May 2013), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.