Capital Gains Tax relief on a property you have lived in

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In this article we will illustrate a scenario where a £100,000 taxable capital gain can be reduced by as much as two thirds!

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

Subject to being able to prove it had, at some point, been your Principal Private Residence then you 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.

So, let’s assume you had owned the property for 10 years and never lived in it. Upon sale you would have made a gain for tax purposes of £100,000. However, if you could prove that the property is/was your Principal Private Residence, even if it was only for 6 months (there is no stated minimum), you could claim 18 months of PPR relief. On that basis you 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, your taxable gain would reduce to £85,000, even though the actual gain would have been £100,000.

On top of that you 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, if you are married you could also claim a further £15,000 each of letting relief, reducing your 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.

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.

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