We’ve recently come across several situations where a doctor originally bought a home to live in, moved away for work, rented it and subsequently sold it – often at a substantial profit.
Will that profit be taxable?
The rules for reliefs in this situation are very complex (to the extent that we have a 300 page textbook just on the subject!)
However, very often you will find that the mixture of available reliefs will be sufficient to wipe out the whole gain.
To start the calculation you need to:
Assume the profit accrues evenly over the period of ownership
Note dates when the property was your only or main residence
Note dates when the property was rented
Note dates when the property was empty – but was empty because your work took you elsewhere
Note dates when it was empty because your work took you overseas
Note dates of return to live in property if applicable
Look at your original purchase cost and legal fees etc on purchase
Look at sale price (or expected sale price) and costs of sale
Look at costs of any improvements to the property (not repairs and replacements – but things like extensions/conversions etc)
Note the last 18 months can be deemed main residence even if you are not living there.
Note that certain reliefs require you to return to the residence after a period of absence.
Once you have all this information to hand, broadly you split the gain between the relevant periods to calculate first the PRR (principal private residence relief) and then the lettings relief claim, which is the lesser of:
• The PRR
• The gain during the rented period
If these two reliefs together cover the gain – then there will not be any tax payable.
Any gain left can be covered by unused annual exemption (£11,300 for 17-18) and then the balance will be taxable at 28% (unless you have any unused basic rate band where that element will be taxable at 18%)
Note that the gain is calculated separately for jointly owned property – and each owner can claim up to the £40k lettings relief and their own annual exemption.
This article presents a very simplified introduction to the taxation of capital gains in relation to property – and does not, for example, debate what is a main residence, what is included (or excluded), what happens where property is transferred between husband and wife, what happens if other residences are available or indeed if any other reliefs are available. In some circumstances an election for a property to be treated as a main residence may have been required where more than one residence is available.
So the moral of this is: don’t assume a big gain will mean a big tax liability – get professional assistance to calculate the taxable gain – you may be pleasantly surprised.
Originally written for and published in NASGP newsletter