Property Tax Insider looks at the mechanics of capital gains tax private residence relief, and how residential property landlords may be able to claim relief.
With landlords facing capital gains tax (CGT) rates of 18% and/or 28% on the disposal of residential properties, this article considers the availability of private residence relief on disposals by landlords.
Private residence relief is available to shelter the gain on disposal of a person’s only or main residence. Ownership of a property alone is not sufficient to qualify for the relief; there must also have been occupation of the property as a residence.
If a let property does qualify for relief, this could add up to a valuable sum, as the following amounts potentially qualify:
- periods of actual occupation;
- the final 18 months of ownership (extended to 36 months in certain circumstances);
- various periods of absence where the absence was followed by reoccupation (the requirement for reoccupation may be relaxed in certain circumstances);
- up to three years for any reason (TCGA 1992, s 223(3)(a));
- any length of period of overseas employment (TCGA 1992, s 223(3)(b));
- up to four years where the taxpayer could not occupy the property because of the location of their place of work or their spouse’s place of work, or because of conditions placed upon them by their employer or upon their spouse by the spouse’s employer (TCGA 1992, s 223(3)(c), (d)); and
- letting relief equal to the lower of (TCGA 1992, s 223(4));
the amount of the gain attributable to letting;
- the amount of private residence relief; and
Ensuring the property is the taxpayer’s residence
To qualify for relief, the property must be the person’s only or main residence, which carries with it an expectation of occupation with permanence. The cases of Goodwin v Curtis  70 TC 478 and Bradley v Revenue & Customs  UKFTT 131 (TC) were similar, as in both instances the properties were occupied following a marital breakdown, but during the period of occupation, the properties were marketed for sale. The courts decided that although occupied, the fact that the properties were marketed for sale meant that there was no intention of permanent residence, and therefore the eventual disposal of the properties did not qualify for private residence relief.
Example – Let property: How much relief?
Fred bought a house on 1 July 2002 for £125,000. He occupied the property until 30 September 2005, when he decided to go travelling. He returned to the property on 1 May 2006 and occupied it until 31 March 2009, when he bought another house jointly with his girlfriend, which they occupied together. He decided to let out his house, and it was let until he disposed of it for £294,697 on 30 June 2016.
The periods qualifying for relief are as follows:
|1 July 2002 – 30 September 2005||Yes||Occupied as main residence|
|1 October 2005 – 30 April 2006||Yes||Period of absence of less than three years and reoccupied as main residence (TCGA 1992, s 223(3)(a))|
|1 May 2006 – 31 March 2009||Yes||Occupied as main residence|
|1 January 2015 – 30 June 2016||Yes||Final 18 months of ownership|
|1 April 2009 – 31 December 2014||Letting relief of up to £40,000||Although let until 30 June 2016, the period from 1 January 2015 to 30 June 2016 is relieved by the final period exemption.|
The property was owned for 14 years in total, with eight years and three months attracting private residence relief.
The total gain was £169,697 and £100,000 of the gain (8.25/14 years x £169,697) qualifies for private residence relief.
The gain attributable to letting is for a period of five years and nine months and is £69,697 (5.75/14 years x £169,697). As this exceeds the maximum amount of relief of £40,000, the amount of relief for the letting period is restricted to £40,000.
This leaves Fred with a chargeable gain of £29,697.
Which property is the only or main residence?
Where a person has more than one residence (which is different to owning more than one residential property), determining which property is the main residence can either be decided on the facts, or an election can be made to nominate which is the main residence (TCGA 1992, s 222(5)).
Where an election is made, the property that is nominated does not have to factually be the ‘main’ residence, but it does have to be a dwelling house in use as the person’s residence (i.e. occupied on a permanent basis) for the election to be valid (see HMRC’s Capital Gains manual at CG64485).
Time limits apply for making an election. An election can be made within two years of whenever there is a new combination of residences. This happens when a person starts occupying a dwelling as a residence, or ceases occupying a property as their residence (which may be different to when the property is acquired or disposed of). Properties to be considered include properties that are occupied under tenancy, but not those occupied under licence.
An election can be varied at any time, and backdated for up to two years from the date that it was given. HMRC guidance (at CG64510) states:
‘A variation will often be made when a disposal of a residence is in prospect or the disposal has already been made and the individual making the disposal wishes to secure the final period exemption. See CG64985+.’
For example, where an individual with two residences validly nominates house A, they may vary that nomination to house B at any time. The variation can then be varied back to house A within a short space of time. This will enable the individual to obtain the benefit of the final period exemption on house B with a loss of only a small proportion of relief of on house A.’
Ownership by husband and wife
For the purposes of private residence relief, a husband and wife may only have one residence (TCGA 1992, s 222(6)(a)). However, when it comes to letting relief, in the case of joint ownership by husband and wife, the good news is that each may have relief of up to £40,000.
Acquisition with the intention of making a gain
The legislation denies relief where (TCGA 1992, s 224(3)):
- a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal; or
- there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.
The first leg of this test is widely drawn. Most people would buy property in the hope of making a gain, and would appear to be caught by this test. However, HMRC guidance at CG65210 states that relief should not be restricted on such a strict interpretation, and the test should be only taken to apply when the primary purpose of the acquisition, or of the expenditure, was an early disposal at a profit. HMRC’s Capital Gains manual also highlights that the first challenge where there is a profit motive should be that the activity is a trade. Only if it is established that the transaction is capital in nature, should TCGA 1992, s 224(3) be considered.
SDLT – another complication?
Landlords will be familiar with the new higher rates of SDLT for the purchase of additional dwellings. This higher rate does not apply where a purchased dwelling is a replacement for the purchaser’s main residence (note – time limits apply).
As stated above, an election can be made that a residence is a person’s main residence for CGT purposes, even where it is not factually the ‘main’ residence. For the purposes of SDLT, the property disposed of must have been the main residence, and it must be the intention that the new property will become the new main residence.
Where there is a contradiction between how the different taxes apply, taxpayers should retain evidence of why they are able to claim that the property was their (main) residence for that tax.
Landlords should consider whether they are able to demonstrate an intention to occupy the property permanently, such that the property is capable of being considered their residence. This intention may be easier to demonstrate in cases where the landlord vacates their home because of a change in circumstances and the property is then subsequently let. The burden of proof is generally on the taxpayer to demonstrate that they are entitled to claim the relief.