Capital Gains Tax and the Private Residence Relief

Everyone thinks they know the rules, but few get it right

Capital Gains Tax (CGT) is a tax on the gain in value realised on the disposal of an asset. When it comes to a landlord’s rental property there are many misconceptions and, dare we say, wacky ideas about how to avoid the tax. In this article we deal with the disposal of a residential property only. A fundamental factor in the calculation of the taxable gain is the period of time when (if at all) the property has been the Principal Private Residence (PPR) of the person disposing of it. If the property has been his/her PPR throughout their period of ownership the Private Residence Relief reduces the taxable amount to £0. If the property has never been his/her PPR the whole of the gain is subject to CGT. And if the property has at some time been his/her PPR then there are generous reliefs from CGT and this is where the mental gymnastics begin.

We will not deal here with the calculation of the gain. The calculation is conceptually quite straightforward but the devil is in the detail. Take great care or ask for professional help. Nor will we deal with the definition of residence. There are also some elections that you might be able to make which can assist in reducing the impact of CGT.

Many landlords are renting out the former family home. For them, qualification for the reliefs is quite straightforward. Others, realising that these reliefs will save thousands or even tens of thousands of pounds in Capital Gains Tax work quite hard to convince themselves (and HMRC) that the property they are selling or giving away has been their Principal Private Residence at some time. This is where the problems begin. Those nice people at HMRC have seen it all before.

One common myth is that you have to move in for six months. That is not so. HMRC is more interested in the quality of occupation rather than the duration. Another problem is the availability of another property that can cloud the issue (unless you make an election within the time limit) (see update at the end of this article). Moving in with a camp bed and camping stove would not qualify. Moving in for a few weeks while renovating the property does not qualify. A farmer who said he moved into a farm cottage for several months was found not to have qualified because he took his meals with his wife back at the main farmhouse and did his laundry there, etc. However to move in properly with the intention of living at the property long term only to find that you had to move out after a short period because of the noise the neighbours made may well be accepted, especially if you have a copy of the local Environmental Health Officer’s notes as supporting evidence.

For the quality of occupation to be safe (for the purpose of qualifying for the PPR set of reliefs) one would have to furnish it properly, and notify HMRC, employer friends and family and so on that you had moved house. And of course, keep the evidence. You might consider photos of the housewarming party or a copy of the mail forwarding agreement with Royal Mail or photos taken by the agent selling it that show it to be furnished and to have some of the domestic clutter we all enjoy. HMRC might also check the electoral role and examine the utility bills to make sure they were addressed to you at the property and showed normal usage. And of course, you would have to deal with any other available property properly or you could be automatically disqualified.

So now, assuming that the property in question has been the PPR of the person disposing of it at some time what reliefs are available? The gain in value is deemed to have accrued evenly over the period of ownership. The gain accruing in the period when the property was the PPR is relieved from CGT. This period of actual residence is extended by an automatic relief for the gain of the last nine months of ownership, and for work related absences (see update at the end of this article). There are also special rules relating to disposal of an interest on divorce, restriction of the relief where part of the relief where part of the property is used exclusively for business purposes, and of course there is the proviso that the taxpayer had no other residence eligible for relief. There are further restrictions if the property has been gifted and an election was made. Be very careful with the special cases. Most will help, but some might restrict relief. Finally, where a property is partly let as residential accommodation either before or after a period of owner occupation a further relief is available in a sum which is the lowest of three amounts and not exceeding £40,000 – but only for the period you were sharing with your tenant.

In addition to the actual period in which the property was the owner’s PPR, and the deemed PPR of the last 9 months of ownership, other absences from the property may be deemed periods when the property was the owners PPR. In all three cases the property must actually be the owner’s PPR both before and after the period of absence with all the “permanency of occupation” criteria being met.

1. Periods of absence for up to three years for any reason whatsoever
2. Periods of absence for up to four years where the absence is a work-related requirement
3. Periods of absence without limit where the absence is work related and all the work /employment duties are performed outside the UK.

Please note that this topic is technically complex, and you should seek further advice before attempting to invoke any of these deemed periods of Principal Private Residence.

This is a game of two halves. Many will try to contrive residency. Be careful. HMRC has seen all these things before, and the rules are quite clear. But then if the property has genuinely been the PPR of the person disposing of it at some time the reliefs are very generous – though rather complex to calculate.

If you are thinking of selling a property we offer a review of the CGT position before you make that commitment and can advise our clients on ways to improve your taxation position.

Update

1. Since first producing this article the three year exemption has been reduced to 9 months.
2. From April 2015 non-residents have had to pay Capital Gains Tax on gains arising on the disposal of UK residential property accruing after 5th April 2015. They may use the Private Residence Relief if they were in the subject property for more than 90 days in the tax year of disposal (reduced pro-rata for shorter periods of ownership in the year of disposal). But if they attempt to qualify for this relief they will have to be very careful not to find themselves treated as UK resident and subject to UK tax on all their global income and gains.
3. There have recently been some “landmark” cases involving properties bought off plan. Contact us if this may be relevant to you.

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The information contained in this article is believed to be correct at the time of publication. The content of this article is intended to be a brief summary of the principal points of the legislation or proposed legislation only, and it is provided for general guidance only. It may not take into account subsequent changes in the law and of necessity it omits much detail. Taxation is a complicated subject and is subject to change. You should only rely on advice prepared specifically for you. Neither the writer nor Landlords Tax Services Ltd can be held liable for any loss arising from any act or omission by you as a result of your understanding of this article. If the subject matter is of interest you should contact us to see if there is a relevant update, and to take professional advice which takes into account your circumstances.