Accidental landlords looking to sell and take advantage of tax breaks on former main residences are being advised of the importance of doing so before April 2014.

The Chancellor George Osborne confirmed in his Autumn Statement that Capital Gains Tax relief on former homes will be halved from 36 to 18 months when the new tax year begins on 6th April 2014.

If at some point a property has been your Principal Private Residence you are entitled to claim PPR relief available on the sale of a property. The last three years (18 months as of April 2014) of ownership are exempt in calculating Capital Gains Tax (CGT), 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. It is, therefore, 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.

Let’s look at two examples of selling a property claiming PPR relief before and after April 2014:

1. Property is purchased 10 years ago for £100,000 and was at some point your principle private residence. It is then sold for £200,000 10 years later making a taxable gain of £100,000

• PPR relief at 36 months would mean the gain is now reduced by the ratio of time owned minus 3 years. Therefore taxable gain now equals 84/120 x £100,00 = £70,000 (effectively PPR relief = £30,000)
• On top of this you can claim “letting relief” which is the lesser of the PPR relief or a maximum of £40,000. Therefore in this example Letting relief equals the PPR figure of £30,000
• Therefore Total taxable gain in this example equals £70,000 – £30,000 (Letting relief) = £40,000
• However it gets better if the property is jointly owned as each owner is able to claim the same Letting relief of £30,000. Therefore taxable gain now equals £70,000 – £30,000 – £30,000 = £10,000

2. Same example, but PPR relief is now only 18 months post April 2014

• PPR relief would now mean taxable gain equals 102/120 x £100,00 = £85,000 (PPR relief = £15,000)
• Letting relief is now the lesser of the PPR figure or £40,000. Therefore Letting relief now equals £15,000
• Therefore Total taxable gain in this example equals £85,000 – £15,000 (Letting relief) = £70,000
• However if the property is jointly owned as each owner is able to claim the same Letting relief of £15,000. Therefore taxable gain now equals £85,000 – £15,000 – £15,000 = £55,000

In Summary:

• Pre April 2014 taxable gain for a sole owner of the above example = £40,000 or for joint owners £10,000
• Post April 2014 taxable gain for sole owner = £70,000 or for joint owners £55,000
• When the length of time the property has been owned is shorter than 120 months the percentage difference between the two examples will be greater.

Don’t forget that each owner get’s a CGT annual exemption which can also be used. As of August 2013 that figure is £10,600 per person, which can be taken off the total taxable gain if it has not already been used elsewhere that year. 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 instead of being an Accidental landlord you have moved into a BTL property at some point prior to sale to take advantage of the above reliefs it can be more difficult to prove residence.

Neil Barlow, an accountant for Pacific Limited, has therefore provided example cases below where landlords failed to prove entitlement to PPR relief:

“It is well known that the test as to whether a property has been used as a residence for the purposes of the valuable CGT private residence relief is based on quality of occupation rather than quantity.

An interesting case on the time aspect was Paul Flavell v HMRC TC00642. The taxpayer lost his claim for PPR relief because the Tribunal decided that there was no evidence to show that the taxpayer had ever lived in the property. They said “if evidence had been provided to support the claim of living at the property for 5 months, they would have found that to be sufficient for the claim”.

“It is also clear that for any chance of success proper evidence is required to establish use as a residence.

P Moore v HMRC TC02827 is the latest case on the issue and is cause for concern.

1. The taxpayer bought a property and let it for four years. The tenant moved out in November 2006, and the taxpayer moved in because his marriage was in difficulties.

2. He sold the house at the end of August 2007, having put it on the market in April. He claimed PPR on the gain on the basis that he had lived at the property for 8 months, having not put it on the market until he had lived there for 3 to 5 months.

3. HMRC argued that the taxpayer’s occupation did not have a sufficient degree of permanence, and no relief was due.

4. The First-tier Tribunal decided the taxpayer did not have the intention of staying in the house for a considerable period as evidenced by the fact that he had not arranged to have correspondence sent to the address while living there, choosing instead to have it forwarded to his new partner’s home.

5. His latest relationship was the crucial factor. Whilst the taxpayer may have been prepared to stay in his property for some time, the tribunal found it hard to accept he had “no serious hope or expectation” of setting up home with his partner (later to become his wife) before March 2007, given the fact that the couple put in an offer shortly after that date to purchase a new house.

6. In addition the taxpayer did not fully change his postal address and he told HMRC in writing that his occupation was temporary.

7. Finally, the Tribunal wanted to see if his new wife would collaborate the story but she did not attend the hearing.”

If you want advice

This article should not be construed as advice. The firm we 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. If you would like an introduction please complete the form below.

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