If you own more than one property it is very important to understand your tax position prior to selling a property to ensure you aren’t caught out by an unexpected tax bill. There are reliefs available such as Principal Private Residence (PPR) and Letting Relief. Having an understanding of how these work could influence your decision when deciding to sell a property.
Principal Private Residence (PPR)
Generally, there is no Capital Gains Tax to pay on the sale of your home. However if you own more than one property the second one is liable to tax when sold.
You can choose which propriety you wish to be your main residence, provided this is done within two years of buying the second property. You can then switch your nominated main residence between the different properties as often as you like as long as you notify HM Revenue & Customs each time.
To qualify for Principal Private Residence Relief (PPR), you must have lived in the property and at one point it was your main residence.
If you sell a property which is currently not your home, but you live in it at some point of your ownership, you can claim Principal Private Residence Relief (PPR) relief for the period that you lived in it. This will mean that you won’t have to pay Capital Gains Tax on the period in which you occupied the property.
Currently, if a property was your main residence at some point, any gains made in the 18 months before the sale will also be eligible for Principal Private Residence Relief (PPR) relief. If you are disable or live in a care home you may be eligible to receive Principal Private Residence Relief (PPR) relief for 3 years.
Letting Relief
If only part of a gain on the sale of a property is covered by Principal Private Residence Relief (PPR), but all or part of the remainder relates to periods in which the property was rented out, Letting Relief can be applied to reduce the remaining chargeable gain.
The maximum amount of Letting Relief due is the lower of:
- £40,000
- The amount of Principal Private Residence Relief due
- The amount of gain you have made on the let part of the property.
Example
You purchased a property in January 2005 and sold it in December 2017, owing it for 13 years. You lived in the property for 6 years, rented it out for 3 years and then it remained empty for 4 years until it was sold and produced a gain of £150,000.
As you lived in the property for 6 years you could claim Principal Private Residence Relief (PPR) for this period and the next 18 months. Therefore relief on 7.5 years of the 13 years of ownership. This part of the gain is £103,845 (7.5/13 x £150,000). Your remaining gain would be £46,154.
As the property was let, Letting Relief is also available. How much? The lower of:
- £40,000
- Amount of Principal Private Residence Relief (PPR) – £103,845
- Gain in relation to renting of the property £34,615 (3/13 x £150,000)
Therefore Letting Relief is available of £34,615. The chargeable gain would therefore be £11,539.
If you own more than one property and are considering selling one, please get in touch and we can advise of any potential tax payable. Call us on 01228 904 904.
