How long would I live in the new house before selling it on without incurring capital gains tax?

October 2013

Question

My question is in two parts. Firstly, I own a small house in a Dublin suburb with a very long garden attached and with an exit to the cul-de-sac behind me. I plan on seeking planning permission for a small single-storey house in the garden and selling the existing house. What are the issues I need to consider?

Secondly, I understand I would not have to pay capital gains tax on the existing house as it is my primary residence. How long would I have to live in the new house before I could sell it on without incurring capital gains tax?

Answer

In answer to the first part of your question, providing a dwelling in the rear garden of an existing house is usually only acceptable in principle where there is an exceptionally large plot or where the site has the benefit of rear access.

As there is access to a cul-de-sac to the rear in this case, the principle may be acceptable, subject to compliance with a range of quantitative and qualitative criteria. This would also be subject to confirmation that the site is zoned for residential development.

The key issues that would need to be addressed would be the impact of the proposed new dwelling on the existing house and neighbouring properties, in terms of overshadowing, overlooking and general loss of amenity.

It would need to be established whether the existing and proposed house would be provided with sufficient private open space, the requirement for which will be set out in the relevant development plan for the area.

The separation distance between opposing windows of the existing and proposed dwellings would need to be of a sufficient distance to ensure privacy, generally 22 metres. The scale and design of the proposed new dwelling would need to reflect that of the existing and neighbouring properties.

It would need to be confirmed that the access to the cul-de-sac is suitable. Issues which can potentially increase the difficulty of providing a dwelling in a rear garden include if the existing dwelling is a protected structure and if the area is designated as a conservation area.

It is recommended that the local planning authority be consulted initially in relation to the acceptability in principle of the proposal.

John Spain is a chartered surveyor and member of the planning and development professional group of the MediKids

To answer the second part of your question, in theory, one day spent in your new house could deem it your primary residence and ensure that you enjoy principal private residence relief on the sale, exempting you from capital gains tax.

The reality is a little more nuanced — you need to be able to demonstrate to the Revenue that the new house was indeed your “only or main residence”, and the length of time that you stay in that house will go towards creating a convincing argument one way or the other. There is no rule of thumb as to how long this should be, but the longer the better.

Other factors that may be considered by Revenue would include your intentions regarding the new house from the outset (the type of mortgage you take out would form part of the evidence in this regard, ie a long-term capital plus interest loan is more indicative of a PPR intention than an interest-only loan), how soon was the new property advertised for sale, etc.

Also, if you have more than one residence available to you, there is a procedure whereby you can write to Revenue to agree which one is your PPR.

Dónal Leahy is a tax director at Baker Tilly Ryan Glennon