If at any time the property has been your only or principal private residence then you should be entitled to some private residence relief. Married couples, civil partners and unmarried individuals can only have one principal private residence at a time. If it has been fully used as your only private residence and there has been no letting or other business activity carried on at the premises throughout the period of ownership, normally Private Residence Relief will apply in full. If you incur a capital loss on your principal private residence then you cannot claim this loss against other gains.
If the property occupies more than ½ hectare (approx. 1.25 acres) then you will have to prove that the additional area is required for the reasonable enjoyment of the property having regard to the size and character of the dwelling otherwise the Private Residence relief will be restricted.
The final 18 months (unless you disabled or go into long term care or the disposal took place before 6th April 2014 in which case it is 3 years) are treated as eligible for relief whether you were actually living in the premises or not, provided that you have had the property as your principal private residence at some time. So if you leave the property, let it out for 18 months and sell it at the end of this period there is no chargeable gain.
Tip: If you are claiming that a property is your principal private residence, remember to tell HMRC that you have changed your address.
If you do have more than one residence which is not let out then you can elect for one or other to be treated as your principal private residence. This must be done within two years of acquiring the second property and once this has been done, the election can be varied. Both properties must be used by you as a residence, so for example if you have a main residence and a holiday home which you use personally, then you should consider making an election.
From 6th April 2015, a property does not qualify for relief where it is situated in a different territory to your place of residence and you do not spend at least 90 days in that property. So if you live in the UK, this does not apply to another property that you own in the UK but you would have to stay at least 90 days in your French holiday cottage in any tax year for it to qualify as an elected principal private residence in that tax year.
If no election is made then it is a question of fact and generally it is the property that is most lived in. Where there are two properties, substantial savings in Capital Gains Tax can be made with careful use of the election.
So if as a resident of the UK you bought a holiday home in the UK and sold it 18 months later without making an election, you could have a Capital Gains Tax liability with no relief. However, if you had elected for the holiday home to be your principal private residence and then one week later elected for your normal home to become your main residence again, you would not have a Capital Gains Tax liability on the sale of the holiday home as long as it is sold within 18 months of purchase.
This would mean that your normal home would have one week out of the period of total ownership as a chargeable gain but this should be so small that it would be covered by your annual exemption.
If you have a study at home, do not use it exclusively for your business otherwise you may have a Capital Gains Tax liability. Any area that has exclusive business use is not eligible for Private Residence Relief and the proportionate gain would be chargeable.
If you let a room in your house to a lodger and they eat with you and use the facilities, then there will not be a restriction on the Private Residence Relief. If you let out a room and you do not provide any services then a proportion of the Private Residence Relief would be lost although you would then be eligible for Lettings Relief.
Lettings relief is only available if the property has been used as the principal private residence at some time. Quite often the two reliefs will extinguish the gain or bring it down to below the annual exemption, so no Capital Gains Tax is payable.
The relief is only available for the period of letting, so if there is a period that the property was neither let nor qualifies as your principal private residence then this is chargeable. To work out whether you are entitled to lettings relief, you work out the total gain as above. You then allocate the period of ownership after 31st March 1982 over the time it was your principal private residence (plus the final three years if appropriate) (1), the period of letting (2) and any other period (3). Take the proportions and apply them to the gain. The gain relating to (1) is exempt and lettings relief is the lowest of a) the gain calculated using period 2, b) the private residence relief calculated using period 1 and c) £40,000.
The £40,000 cap is per individual, so if a couple own a property equally, £80,000 would be available. This does mean that a couple can realise a gain of at least £160,000 tax free provided that the property is let for a period equal or less than the period of private residence and there is no other use of the property.
Let’s see how this works by way of an example.
Joe and Brenda own a house which they purchased for £160,000 and they lived in it for nine years. They then left the property and it was empty for one year following which they let it out for ten years. They then sell the property for £360,000. (Costs of purchase and sale have been ignored but would be relieved.)
The Capital gain is £200,000 (360,000 - 160,000)
|1. Private Residence Relief||9 years plus final 1.50/20||Relief||£105,000|
|2. Period of Letting||10 years / 20||Gain||£100,000|
|3. Other Period||1 year / 20||Gain||£10,000|
The total is not the gain because the final eighteen months are eligible for private residence relief.
To calculate the lettings relief it is the lowest of :
|a) The gain at 2||£100,000|
|b) Private residence relief at 1||£105,000|
|c) Lettings relief maximum of £40,000 each||£80,000|
The lettings relief for the couple is therefore restricted to the lowest (c) £80,000.
The Capital Gains Tax is then calculated as follows :
|Capital Gain on Sale of Property||£200,000|
|Private residence relief (1)||£105,000|
|Lettings relief (c)||£80,000|
|Annual Exemptions (assuming no other gains) 2 x £11,300||£22,600|
Even with a gain of £200,000 there would be no tax payable with this scenario.
However using the same figures but with the period of letting first and the period of occupation as a private residence last, the private residence relief would fall to £90,000. The chargeable gain would now be £30,000 (£200,000 - £90,000 - £80,000). Deducting the annual exemptions of £22,600 would leave a taxable gain of £7,400 which would normally suffer tax at a rate of between 18% and 28% depending on each individual's income. So by a slight change in the way the property is occupied can cause an additional tax liability of up to £2,072 in this example.
If you have to live in job related accommodation for a period, then you can claim principal private residence relief on a dwelling which you own in that period, provided that you have bought it with the intention of living there, even if you let it out.
Living accommodation is job related if :
It is provided by reason of the individual's employment, or by reason of the employment of the individual's spouse or civil partner, for the proper performance of their duties, or
Where the accommodation is provided as part of special security arrangements.
There are anti-avoidance rules which prevent directors of their own companies claiming that accommodation is job related.
© Thandi Nicholls Ltd 2017 All Rights Reserved - The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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