Landlords CGT Question

Dear Laniora,

Private Residence Relief is available to exempt the capital gain on the disposal of a main residence providing the property has been the only or main residence throughout the period of ownership. In addition, provided that a property has at some time been an individual’s only or main residence, the last three years of ownership are always exempt in calculating CGT, whether the individual is living there or not.

There are also other reliefs available depending on the reason for the absence and there is also a letting relief. And do not forget the CGT annual exemption, currently £10,600.

To answer your question, the relief which you mention does not exist. If you had sold the property within three years of it ceasing to be your only or main residence then you would be able to claim private residence relief on the entire gain. You will now need to calculate the gain and then see what reliefs you can claim. It may be the case that the entire gain is covered by a mixture of private residence relief, letting relief and annual exemption.

This is a very complex area and it is important to obtain professional advice to ensure that the correct reliefs are claimed to minimise your tax liability.

Neil - I'm a little confused by your reply - I don't think Laniora actually mentions a specific relief she is trying to claim. But I agree with your view: since the 3-year limit has passed, she is liable to CGT on the extra 6 months. In other words, HMRC will estimate the gain between her moveout date and now, and charge her 6/42 of the gain (i.e. 6 months out of the 42 months of absence) when she eventually sells. This figure may well fall within her annual CGT exemption, or her lettings relief, in which case nothing is owed.

I would advise Laniora to get the house valued by three agents when she moves back in, so she has some evidence of what the house is worth, otherwise HMRC will use an "estimate" that is bound to be to their advantage. Any evidence as to the move-out value will also be useful.

Laniora will only be liable for CGT when she sells, and if she returns to the property and lives there for 20 years, any tax will be minimal. I think however that what she is asking is how long does she need to live in the property to re-establish residency before putting it up for sale? If she only stays 1 month and then puts the property on the market, will HMRC treat this as just another month of non-residence so she will be liable for 7/43 of the gain? From everything I've read, there's no hard and fast rule: it depends on the attitude taken by the individual tax officer. Given that HMRC is under instruction to maximise revenues and crack down on people perceived to be switching rapidly between properties and abusing the PPR exemption, I think she needs to be cautious and establish residency for at least six months, and preferably a year. If she tries to sell in less than six months, she will need a very very good, demonstrable reason for selling, otherwise HMRC will say she is just "flipping" houses

Having been through an aspect enquiry/tax investigation myself on this very issue last year, and read more case law than is good for my sanity, I would advise anyone seeking to establish PPR status to be very diligent in getting every bill and bank or CC statement you can think of moved to the new address: you need as much documentation as possible to prove residence, because time and again if a case gets to a tax tribunal because HMRC doesn't believe a claim of residence, the issue is decided on the basis of what documentation is available. Council tax, GP and dental registration, and electoral roll are very useful too. Also, it helps to have a clear narrative to give about why you needed to live at that address, for reasons of work, caring for a relative, relation breakdown or whatever.
An example used in Wolters Kluwer's tax books on this issue is that someone buys a house and lives in it for two years, then works in Spain for 3.5 years (renting the house out), then comes home for 3 months, but is then asked by his employer to locate himself in Hungary, so he rents the property out for another three years, before returning home for two more years, then sells. The total CGT liability then would be six months out of a total period of ownership of 10.75 years. The 3 months of residency in the middle is crucial, because it re-establishes residency and re-starts the three year rule. The owner also has a clear reason for moving out after three months, and lives in the property again after returning to the UK.

Further to your comments, I agree that to establish a PPR you need to be very careful, however any advice needs to be based on all of the facts which unfortunately we do not have. For example, if Laniora has no other property available to her then it may be that living in the property as her main residence for one month may be enough to establish the property as a PPR again, it is the quality of occupation that is important not the quantity. In
addition, we do not know if Laniora wants to sell the property now or in the future. However, as I state she will still have a CGT issue which needs to be considered.

The capital gain will be based on selling price less cost, therefore it would not normally be necessary to obtain any valuations. HMRC will not estimate the gain between Laniora’s move out date and now and charge her 6/42 of the gain. The entire period of ownership is considered and PPR is claimed based on the period the property qualified for the relief,
including the last three years of ownership – we do not know this information so cannot begin to calculate the chargeable gain. For example, if the entire period of ownership is 10 years and the property is sold immediately, then 6/120 of the gain would the balance not qualifying for PPR. This may then be covered by the annual exemption and/or letting relief.