Many will know that if you purchase a residential property, live in it for the entire period of ownership and sell it for at a gain, the entire gain is covered by principle private residence relief and no tax will be due (also no reporting of the gain is required).

EXAMPLE 1

Purchased January 2010 for £150,000

Sold December 2021 for £350,000

Gain on disposal £200,000

Principle private residence relief £200,000

Tax £0

If someone buys a residential property, never lives in it and sells it at a gain, any gain in excess of their annual exempt amount will be subject to capital gains tax. And as it is a gain relating to residential property the tax rates are 18% for amounts falling within the unused basic rate band for the year & 28% for gains in excess of the basic rate band. If tax is due after taking into account available losses and the annual exempt amount, reporting and payment of tax due must be made within 60 days (for sales completed before October 27, 2021, the deadline is even tighter at 30 days). Based on the above example this scenario would result in a tax bill of £52,556 (assuming the basic rate tax band has been fully utilized by earnings for our calculation and the full annual exempt amount for CGT is available)

But what is the situation if you own a property, live in it and also for a time rent it out? Things have changed here recently and the relief is no longer as generous as it used to be.

The rules are now far less generous (for sales after 6 April, 2020). Lettings relief is only available if the tenant lives in the property with you. This will be further affected by how much of the property the tenant has exclusive use of.

EXAMPLE 2: Facts:

Purchase January 2010

January 2010 to December 2013 occupied exclusively

January 2014 to December 2021 entire property let to tenant

(again assuming the basic rate band has been fully utilized by earnings)

Purchased January 2010 for £150,000

Sold December 2021 for £350,000

Gain on disposal £200,000

PPRR on sole occupation £66,667

Final 9 month deemed PPRR £12,500

Annual exempt amount £12,300

Amount taxable £108,533

Tax due @ 28% £30,389

Under the previous rules the entire property could be let out and so long as it was your main residence for a time (before or after the letting period), the period of occupation was fully covered by principle private residence relief, the final 9 months of ownership were deemed to be covered by PPRR, and lettings relief could be claimed up to a maximum value of £40,000.

EXAMPLE 2: Facts:

Purchase January 2010

January 2010 to December 2013 occupied exclusively

January 2014 to December 2021 entire property let to tenant

(again assuming the basic rate band has been fully utilized by earnings)

Purchased January 2010 for £150,000

Sold December 2021 for £350,000

Gain on disposal £200,000

PPRR on sole occupation £66,667

Final 9 month deemed PPRR    £12,500

Lettings relief £40,000

Annual exempt amount £12,300

Amount taxable £68,533

Tax due @ 28% £19,189

In order to obtain lettings relief in future the property must qualify for principle private residence relief and be occupied at the same time as the tenant. Given the short time frame for reporting taxable gains on residential income it is important to consider the situation carefully and as soon as possible when considering a sale. This will provide time to review the records and prepare accurate calculations.