Romford Essex Accountants Blog; Property Owners – Do you have to pay CGT on your former residence which you now let out before selling it?
For whatever reason, many property owners are now renting out there former residences after moving to a new home. Eventually, the property owners sell their old residence leading to the question – Do you pay Capital Gains Tax on the sale of the old residence?
The answer is maybe, depending on the circumstances.
Main Residence Or Principal Private Residence Relief
Because the property owner has resided at the property as his/her main dwelling home then the Principal Private Residence Relief (PPR) can be claimed.
This exemption covers the:-
- The dwelling home;
- Land enjoyed as a garden with the dwelling home as long as the size of the garden does not exceed permitted criteria.
Basically, the relief relates to the portion of the capital gain relating to the period of ownership during which the property was the owner’s only or main residence. Therefore, the capital gain is time-apportioned and the gain attributable to periods where the property was not the only or main residence is taxable.
If the property is let at some point during the period of ownership, there will be periods where the only or main residence condition is not met.
Some relief may still be forthcoming at the times when the owners are not resident at the dwelling home:-
- Ignored Absences
Provided that the owner has no other property qualifying for relief, certain periods of absence are ignored in computing the gain. These include:
• period(s) of absence not totalling more than 3 years;
• any period of absence of any length during which the owner is employed overseas;
• any period or periods of absence not totalling more than four years during which the owner is required to live in job-related accommodation.
The owner must actually live in the property as his or her main residence after each period of absence for the absence to be ignored, unless this is not possible as a result of the owner’s employment.
- Last 36 Months
The last 36 months of ownership are always treated as a period of occupation if the property has been a main residence at some point, regardless of whether the owner is actually living in the property at that time.
Letting Relief
Where a gain is made on a property that has been the owner’s only or main residence at some point and which has also been let as residential accommodation, additional relief is available. This is known as letting relief. The additional relief is the lesser of:
• £40,000 per owner (or £80,000 for couples)
• the amount of the main residence exemption otherwise due; and
• the amount of the gain otherwise chargeable to tax.
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Example John purchased a house on 1 January 2000 and sold it on 31 December 2010. He lived in it as his main residence from 1 January 2000 to 31 December 2004, when he brought a new house which became his main residence. The property was let from 1 July 2005 to 30 June 2009. It was empty from 1 July 2010 to 31 December 2010. He makes a gain on sale of £400,000. Total period of ownership = 120 months £ Less main residence relief (84/120 x £400,000) (280,000) Gain before letting relief 120,000 Letting relief: (40,000) Lower of: Chargeable gain 80,000 If John had not made further gains in 2010/11, the gain of £80,000 is further reduced by his annual exemption of £10,100 leaving taxable gains of £69,900 on which tax would be payable. |
The above example shows that even if a person’s home has been let during the period of ownership it does not necessarily result in the loss of the PPR exemption.
Therefore, it may be possible to sell the property without accruing a Capital Gain Tax liability.
If you have any questions concerning this blog then contact us here at Trueman Brown Chartered Accountants.