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TDQ: Capital Gains Tax and Private Residences

16 December 2019

Brand Financial Training examines the tax rules around first and second properties, using a case study to illustrate the points.

We all know that when we sell our home it is exempt from capital gains tax (CGT) if it has been our main residence. If we can’t claim it as this because it is a second property or a let property then any gain we make on its disposal will be potentially subject to CGT.

If the house has been lived in for some of the time then part of the gain can be ignored. The proportion of the gain that is not taxable is worked out as:

Total gain x (period of occupation divided by total period of ownership)

There are various absence periods that can be ignored when working out how long someone has lived in a property:

  • A delay of up to 1 year between the property being acquired and the person occupying it (perhaps because the old home isn’t selling or major refurbishment needs to be done on the new one preventing occupation). In some exceptional circumstances HMRC may allow a period of up to 2 years.
  • Periods of 3 years (for any reason) if preceded and followed by residence (and no other home was exempt)
  • Periods of up to 4 years when the individual had to work somewhere else in the UK (any absence when work is outside the UK) (and again these were preceded and followed by residence and no other home was exempt)
  • Any period where an individual lives in accommodation that is job-related and where there is the intention to return to the main residence
  • The last 18 months of ownership as long as the home was the main residence at some point (this is 3 years for those with a disability and those in long-term care)

Another exemption applies where a house has been let; this could be an important exemption for a lot of clients who have a house that they haven’t been able to sell and have decided to rent it out and move on anyway.

Couples that get together ‘later in life’ may each own a property and decide to hold onto them both; living in one and renting the other.

If the rented property is later sold then letting relief can apply. Firstly the letting has to be for residential use and if it passes this test then the amount of the relief is the lowest of three amounts: (a) £40,000 (b) the amount of Private Residence Relief or (c) the amount of any gain made because of the letting.

Let’s look at an example:

Marcus makes a gain of £150,000 when he sells his home. He has owned it for 10 years; living in it for 5 years and renting it for 5 years.

Remember the formula to work out private residence relief is: total gain x (period of occupation divided by total period of ownership).

The total gain is £150,000 and this is multiplied by 78 months/120 months. The 78 months is calculated as the 5 years he lived there (60 months) plus the last 18 months he owned the property. The total period of ownership is 120 months as he owned the property for 10 years. £150,000 x 78/120 = £97,500. The proportion charged to CGT is therefore £150,000 x 42/120 = £52,500. If Marcus has his annual exempt amount available he can deduct £12,000 from this to leave a gain of £40,500.

The good news is that Marcus can also qualify for Letting Relief. As mentioned above he can get the lowest of the following: the same amount he got in Private Residence Relief (£97,500); £40,000 or the same amount as the chargeable gain he made from letting the property (£52,500).

The lowest of these figures is £40,000 so he can claim this as Letting Relief meaning the balance is now £52,500 – £40,000 = £12,500. If Marcus has not used his annual exempt amount of £12,000 this can also be deducted leaving him with just a gain of £500. If Marcus is a higher rate taxpayer he will pay 28% on this and if he is a basic rate taxpayer he will pay 18%.

Remember that from April 2020 the letting exemption will not apply where the whole house is let and will only apply where the owner of the house is sharing occupancy with the tenant.

About Brand Financial Training

Brand Financial Training provides a variety of immediately accessible free and paid learning resources to help candidates pass their CII exams. Their resource range ensures there is something that suits every style of learning including mock papers, calculation workbooks, videos, audio masterclasses, study notes and more. Visit Brand Financial Training at https://brandft.co.uk

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