You recently sold a property which was once was your home, then occupied by paying tenants and finally used as offices. How do you work out how much of the gain you made is taxable?

Gains

If you sell your home for more than you paid for it the difference is a taxable gain. Capital gains tax (CGT) private residence relief (PRR) reduces the gain to zero where the property was your only or main home for the whole time you owned it. However, PRR is sometimes reduced if it was not your main home for some of the time.

Reduced PRR

Some periods of absence are allowed without affecting PRR but usually only where you use the property as your home again after the absence. There’s a special addition to PRR if you let your home. This is known as letting relief, but for gains on or after 6 April 2020 it only applies if you were living in the property at the same time as your tenants.

Calculating the reduction

If a gain doesn’t qualify for full PRR because it hasn’t been your main home for all the time you owned it, “apportionments of consideration” are required. In plain English that means you must divide the sale proceeds of the property between the amount which can qualify for PRR and the amount which cannot. An apportionment must be made using a “just and reasonable” method. If the reason that the apportionment is needed is because the whole property was used for something other than as your main home, time apportionment is your only option. For example, if you owned the property for ten years and lived in it for five, 50% of the consideration and thus the gain can qualify for PRR.

Tip. Where you didn’t occupy the property as your home during the final period of ownership (usually that’s the last nine months) the gain relating to that period is also exempt where PRR applies to any part of the gain.

Trap. It doesn’t matter how and when the value of your property increased, the gain must be treated as arising evenly over the whole period of ownership. This is so even where a specific event has caused a change in the property’s value, e.g. adding an extension.

Example. John and Ellen bought a property for £350,000 (including costs) and immediately occupied it as their only home. Five years later they bought another property and moved in and let their previous home. The tenants left two years later which allowed John and Ellen to convert the loft. This increased its value by 15%. The property was unoccupied for six months during the conversion and then let for two and a half years at which time it was sold for £650,000 (net of costs).

The proceeds (and so the gain) must be adjusted on a time basis. The relevant factors for this are the period of ownership (120 months), the period for which it was their only home (60 months) and the final period of ownership (nine months). The proceeds can therefore be apportioned 69/120 as the PRR qualifying period and 51/120 as non-qualifying.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.