In the modern world, it is now commonplace for people to move house (perhaps to take up a new job) but keep the original property to rent out. This can lead to Capital Gains Tax (CGT) consequences, as the individual will not then have occupied the house as the main residence throughout the period of ownership. So what are the CGT issues?
Private residence relief can be claimed by individuals who own a house that they sell but have occupied it as their sole or main residence throughout the whole period. Further, it is also possible to claim a further 18 months as relieved from CGT (usually if they moved out before selling) so long as they did occupy the house at an earlier stage. But what about longer periods of absence?
For private residence relief, other periods of absence can be ignored and are treated as if they were periods when the house or part of it was the individual’s only or main residence. These include:
- Any length of time whilst employed abroad; and
- Employment elsewhere in the UK up to four years.
It is crucial to be aware that the CGT rules require that both before and after these periods there was a time when the house was the individual’s only or main residence unless prevented from re-occupying the house for work reasons.
There is no minimum period of residence and it is a question of fact, dependent on the quality of the occupation, whether occasional and short residence will suffice for this purpose, (there are a number tribunal cases on this subject).
In the case of absences due to employment, the relief also applies if the absence is due to the employment of the individual’s spouse or civil partner.
In order for a period to be treated as a period of absence eligible for relief, it must fall within the definition. This means that a period during which the house was not the individual’s only or main residence, and throughout which did not have an interest in another residence, is eligible for relief. However, a residence is not eligible for relief if a nomination is made in favour of another residence. Therefore, any question of eligibility may be resolved by the making of an election in favour of the residence from which the individual is absent. For disposals on or after 6 April 2015, the definition of a ‘period of absence’ has been amended and is now defined as a period during which the dwelling house was not occupied by the individual as a residence. Therefore, a tax year or part for which a dwelling house is treated as not occupied as a residence will be treated as a period of absence eligible for relief if it satisfies one of the relevant conditions.
There is a separate lettings relief for capital gains of up to £40,000 for houses rented out. This is a subject all of its own and space does not permit this being discussed at length here. Just make sure you consider these reliefs and ask questions when looking at CGT on residential property sales.
As with all such tax situations, advice should also be sought before proceeding. For further details contact us.