Capital Gains Tax relief on a property you have lived in

Mark Alexander founder of Property118.com

Mark Alexander founder of Property118.com

When I eventually decide to downsize from my current home (6 bed house with 5 acres of land) I may well decide to live in one or more of my buy to let properties, not least for tax purposes, especially if I have any plans to sell any of them.

In this article I am going to demonstrate a scenario where a £100,000 taxable capital gain can be reduced by as much as two thirds!

I must point out that I am not a tax adviser and this article is written for illustrative purposes and must not be construed as advice.

Example of how moving into a BTL property could reduce Capital Gains Tax

If I had owned a property as a buy to let for X years then it could make sense to move into it for a while as my Principal Private Residence “PPR”.

Let’s assume I purchased the property for £100,000 and it’s now worth £200,000, i.e. a £100,000 taxable capital gain if I were to sell the property without ever having lived in it.

Subject to being able to prove it had, at some point, been the Principal Private Residence of my family then we would be entitled to claim PPR relief. This is because PPR relief is available on the sale of a property which has at some time been an only or main residence. 18 months of ownership are exempt in calculating Capital Gains Tax, whether the individual is living there at the time of selling or not.

It is important to note that PPR relief claims are often investigated by HMRC. For this reason it is imperative to be able to prove, beyond any shadow of doubt, that the property was indeed your Principal Private Residence. Examples of how this can be achieved are Council Tax records, bank statements, voters roll, utility bills, doctors and dentists records etc. The more evidence the better of course.

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So, let’s assume my wife and I had owned the property for 10 years and never lived in it. Upon sale we would have made a gain for tax purposes of £100,000. However, if my wife and I could prove that the property is/was our Principal Private Residence, even if it was only for 6 months (there is no stated minimum), we could claim 18 months of PPR relief. On that basis we would only pay Capital Gains Tax on 85% of the gain, i.e  10 years of ownership less 18 months of PPR relief. In other words, our taxable gain would reduce to £85,000, even though the actual gain would have been £100,000.

On top of that we would also be able to claim “Letting Relief” at the same figure or £40,000 whichever is the lower. The good news is that each person can claim letting relief. Therefore, in the example above my wife and I could also claim a further £15,000 each of letting relief, reducing our taxable gain to just £55,000.

Finally, don’t forget that each owner also has a Capital Gains Tax annual exemption allowance which can also be used to reduce the taxable gain. For the 2014/2015 tax year that figure is £11,000 per person. Therefore, using my example above, a £100,000 taxable capital gain could be reduced to £33,000.

This is a VERY good reason to take professional advice!

The cost of the advice could well represent only a fraction of the tax savings 🙂

If you lived there previously

You do not need to move back into a property which you previously lived in and subsequently rented out in order to benefit from the tax breaks above. The fact that you occupied the property as your Principal Private Residence before you rented it out still counts.

If you want advice

I am not a tax adviser and this article should not be construed as advice.  The firm I use for accountancy and tax advice specialise in advising on the affairs of property based entrepreneurs. They are a boutique firm based in Norwich but they act for clients throughout the UK. One major advantage of using a smaller boutique firm in the provinces is price. Having said that I don’t believe you will ever find better advice from a big six firm in the capital regardless of how much you pay. I have been with them now for over a decade and I can honestly say that the fees I have paid have been just a fraction of the money they have saved me. If you would like a personal introduction please complete the form below.

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This article was last updated on 10th December 2014.

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My buy to let property investment strategy is documented and constantly updated in the Advice section of this website. To get back to the main menu >>>

 

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