PPR (Principal Private Residence) – the tax implications of selling property
If you own any property at all – whether you’re letting it out or living in it yourself – it’s useful to understand the basics of how Capital Gains Tax (CGT) works and what might be applicable if you decide to sell it.
Capital Gains Tax applies to the amount of profit you make when you sell or give away an asset that has increased in value since you first acquired it. This tax is applied to the amount of gain you make, not the total sum of money you’ve received. Generally, you won’t have to pay this tax if you give an asset away to a spouse or civil partner.
Capital Gains Tax on property
If you sell your only, or principal home you won’t usually pay CGT on any profit you make from the sale because you will qualify for Private Residence Relief. This tax relief is automatically applicable in the following circumstances:
- The property has been your only or main home for the whole time you’ve owned it.
- You have only ever used the property as your own private residence. (If you have, for example, rented it out or used it as business premises you may have to pay CGT in certain circumstances.)
If you usually live between a number of properties you can nominate one property as your main home (known as your Principal Private Residence). In this case you will have to write to HMRC to inform them of the property you are nominating and do so within 2 years of starting to live in more than one home.
If you spend a lot time away from home, for example for business purposes if you’re contracting away from home, you can still claim full Private Residence Relief in the following circumstances:
- For up to 1 year from when you first bought the property.
- For up to 3 years before you sold it, as long as it was your only or main home for at least some of the time that you owned it.
There are restrictions on this though, for example you may not get the full amount of relief if you used part of your home only for business, or the main reason for buying the property was to make a profit on selling it, or if you rent the property out. However, in the case of renting out all or part of your home you may be able to offset this by claiming Lettings Relief instead.
If you’ve been renting out property you own you may be allowed to claim this relief in some circumstances. It’s important to get the maths and timings right on this though to make sure that your claim is valid and that you’re claiming the correct amount. An example of a Lettings Relief calculation is given below to give you an idea of how this works.
Let’s say you rented out a house that was once your main residence. For CGT purposes the last three years of rental are treated as if you had lived there. So, if you only rented it out for three years or under there would be no CGT to pay.
If you rented it out for longer then there is a further relief possible in addition to the 3 year relief above. Any gain is apportioned over the total period of ownership, with the last three years and any period you lived there being exempt. The remainder of the gain is then taxable, but the amount taxable is reduced by the lower of £40,000 or the exempt fraction.
Period of ownership: 6 years. The first year you lived there and then you rented it out.
- Purchase price: £100,000 Sale price: £200,000 Gain: £100,000.
- Lettings Relief calculation: 1/6 is your main residence plus 3/6 is your lettings relief = 4/6 exempt. This leaves a taxable part of 2/6.
- The exempt fraction of 4/6 = £66,666
- The taxable fraction of 2/6 = £33,333
- The relief amount on the exempt part is the lower of £40,000. So, £66,666 is more than £40,000 which means the allowable amount is £40,000.
- The total taxable gain is calculated as £33,333 less £40,000 = nil.
So, in this case there would be no CGT to pay.
As you can see, this could potentially get quite complicated! Fortunately, with the support of Intouch to help, you can relax. If you need guidance on Capital Gains Tax on your properties, or on any other tax matter, you can speak to or email your own personal Intouch accountant for friendly, professional advice. We really know our stuff, so you really can count on us.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.