As the ancient proverb says: ‘With money you can buy a house, but not a home’. HMRC does not distinguish between the two unfortunately, so whether you have a house or a home, it’s worth understanding how you may be taxed on its sale.
Most people know that there is no tax on the sale of your family home. But what happens if you are really awkward and decide to buy another property? What happens if you rent one of these properties out for a while? Are there any exemptions or tips that you should know about?
As it happens – yes. So, grab a mug of coffee and get to grips with the oddity that is principal private residence.
The first thing that you need to know is that the whole gain on disposal of your principal private residence (lovingly referred to as PPR) is exempt from capital gains tax. You can only have one PPR at any one time, and married couples or couples in a civil partnership can only have one between them, so if you have more than one property, careful planning is a must.
If a property has been your PPR at any point, HMRC will deem that it was also your PPR in the last three years of ownership – even if you actually had another PPR at that point. Generous? Actually, yes. In keeping with the generous theme, if you buy a property that you intend to use as your PPR, but can’t move in straight away, HMRC will allow the first 12 months to be treated as if you did, as they will deem that you could not move in because you were having the house altered or decorated or even that you stayed at your old house until that was sold. That’s another one year exempt from tax.
What HMRC will also say is that if you lived away from your PPR for up to a three-year period for whatever reason, provided you lived in your PPR before and after, they will also exempt that period (there are all sorts of conditions though – so make sure you get proper advice).
Let’s look at an example to see this in action. Bob and Dana bought their first home (a two-bedroom house) in 2000 for £100,000. They lived in this house until 2003, when they bought a larger three-bedroom house for £200,000, which they moved into and rented the old house out.
In 2006, they moved into an even larger four-bedroom house that they purchased for £300,000. They sold the two-bedroom house for £225,000 and rented the three-bedroom house out. How much tax will there be on the disposal of the two-bedroom house?
The two-bedroom house was their actual PPR from 2000-2003. From 2003-2006 they rented it out, but as the house was their PPR at some point, the last three years count as an exempt period. Therefore, the whole of the gain on the sale of the first house is exempt from CGT.
If you have more than one property, you can make an election within two years of acquiring the property that you wish it to be classified as your PPR, even if it is not actually your PPR. The catch is that it must be available for you to use as your PPR so you can’t also be renting it out.
If a property has been your PPR and it has been rented out, there is a lettings exemption available, which is the lower of an amount equal to the PPR exemption and £40,000. What does that mean in normal English? Let’s look at an example to find out. Sara and Ash jointly purchased a house in 1999 for £300,000. They lived in it for one year and rented it out from 2000-2008, when they sold the property for £450,000.
The gain is obviously £150,000, and the property has been owned for nine years. Year one it was actually the PPR, the last three years always count as PPR so four years are exempt (4/9 of £150,000 = £66,667). In addition, the lettings exemption is £40,000 (each owner) or the PPR exemption – whichever is lower. In this case, £66,667 is lower than £80,000, which means that lettings relief is another £66,667!
So the gain: £150,000; exempt period: (£66,667); lettings relief: (£66,667); chargeable: £16,666. As this is jointly owned, both spouses will be able to use their annual exemption towards it (assuming no other gain). If you have more than one property, or are thinking of buying another property, it is worth speaking to your accountant, because good planning is essential.