The UK government's plan in the recent spring Budget had been to place further restrictions on 'private residence relief' (PRR) (a capital gains tax (CGT) relief) available on the sale of a residential property. Although COVID-19 put paid to that. 

Luckily for many of us when we sell our home CGT does not feature in the conversation, for many land and buildings transaction tax (LBTT) is more likely to be a tax concern. If for example, you own a holiday home or buy a property and rent it out and never live in it, when you come to sell the property you could be liable to capital gains tax (CGT) on any profit from the sale. Landlords may be eligible for lettings relief which I will discuss further in an upcoming blog.

Calculating a gain

To calculate a gain for CGT  purposes you deduct the acquisition cost of the property and the expenses of sale from the sale proceeds, improvements can also be taken into account. This gives you a potentially taxable gain. Luckily modest gains are not subject to tax. Individuals have a tax-free annual allowance of £12,300 (for disposals on or after 6 April 2020). If the gain is within this amount in any one tax year there should be no tax to pay. The allowance will also cover the first £12,300 of profit on more significant sales. 

I blogged in January about the changes to the CGT reporting and payment rules for residential properties. Please pay close attention to the new 30-day rule for reporting a gain on the disposal of a residential property and paying any tax due.

Private residence relief

If you buy a house with the intention of living in it and you go on to live in it, you will ordinarily be eligible for PRR when you sell the property. In these circumstances there should be no CGT bill. 

This is not so straightforward particularly for those who own more than one property, perhaps a flat that is used during the week for work, a holiday home in addition to the 'main residence' or a property that may have been split off from the main property. In these examples full PRR may not apply. You should be aware of this when considering a sale as your plans for the proceeds could be impacted by an unexpected CGT bill.

HMRC 'tightening the noose'

HMRC in recent years have tightened up the rules around PRR. For example, the period of absence allowed within a period of occupation (for PRR purposes) say for working abroad has been reduced. The final period of exemption where occupation has come to an end when you have used the property as your main residence is currently 18 months. What will become the Finance Act 2020 will reduce this to 9 months probably from 6 April 2021 but possibly earlier. This is something which we will post an update on in due course. 

It is worth remembering that it is not always necessary to live in a property for a significant period of time to establish a valid PRR claim. The tests applied are factual and based on permanence, continuity or an expectation of these factors. Usually these facts can be established straightforwardly but not always and recent case law tells us that HMRC are challenging more and more PRR claims. If you are concerned about how this may affect you then please come and speak with us about this and your other CGT issues.