Capital Gains Tax, Private Residence Relief and the Accidental Landlord

Posted by on Feb 25, 2014 in Newsletters | No Comments

A topic that we have been asked to cover is the impact of the changes to Private Residence Relief that will come into effect from April 2014 and, in particular, how this affects the ‘Accidental Landlord’ who has rented out their property as residential accommodation as a result of, say, a work secondment abroad.

To recap on the change, up until April the final thirty-six months of ownership of a Primary Residence is included in the calculation of the allowable period for Private Residence Relief irrespective of whether the property was lived in by the owners or let out.  From April, this final period is reduced from thirty-six months to eighteen months.

For the ‘Accidental Landlord’ working abroad, the property they have let out would remain their Primary Residence so long as they do not own any other home in the UK.  As a result, the property would qualify for Private Residence Relief on the qualifying period that the owner has lived at the property, subject to certain other criteria.

In the scenario below, the property has been owned for eight years but let out for the last three.

Under the current rules, the Private Residence Relief would apply to all eight years but, from April, this period would reduce to six and a half years.

If the property were sold and there was a gain of £200,000, before April the Private Residence Relief would fully cover the gain.  After April, £37,500 would not be covered – the fraction of the gain from the eighteen months not covered divided by the period of ownership.

However, there is a second relief that would apply when a Primary Residence is sold that has been let out as residential accommodation for part of the time of ownership, Letting Relief.

The amount of Letting Relief is calculated as the lowest of:

• the amount of Private Residence Relief already calculated, or

• £40,000, or

• the amount of any chargeable gain you make during the period of the letting

In this scenario, the Letting Relief would be the amount of chargeable gain made during the period of letting of £37,500 resulting in there being no chargeable gain subject to Capital Gains Tax.

Years of Ownership

8

8

     
Years of Residence

5

5

Years of Letting

3

3

     
Years of Qualifying Residence

8

6.5

     
Gain

£200,000.00

£200,000.00

     
Private Residence Relief

£200,000.00

£162,500.00

     
Chargeable Gain

£0.00

£37,500.00

     
Letting Relief

£0.00

£37,500.00

     
Chargeable Gain

£0.00

£0.00

     
2013-14 Annual Exempt Amount

£10,900.00

£10,900.00

     
Amount Chargeable to Capital Gains

£0.00

£0.00

     
Capital Gains Tax @ 28%

£0.00

£0.00

Looking at a second scenario where the property had been owned for ten years and let out for the last five and, again, there was a gain of £200,000 when the property is sold in April, the Private Residence Relief would be £130,000 covering six and half years of ownership and the Letting Relief would be capped at £40,000.  As a result, there would be a residual chargeable gain of £30,000.

After taking into account the individual Annual Exempt Amount (£10,900 for the 2013-14 tax year), the amount subject to Capital Gains Tax would be £19,100.

Years of Ownership

10

   
Years of Residence

5

Years of Letting

5

   
Years of Qualifying Residence

6.5

   
Gain

£200,000.00

   
Private Residence Relief

£130,000.00

   
Chargeable Gain

£70,000.00

   
Letting Relief

£40,000.00

   
Chargeable Gain

£30,000.00

   
2013-14 Annual Exempt Amount

£10,900.00

   
Amount Chargeable to Capital Gains

£19,100.00

   
Capital Gains Tax @ 28%

£5,348.00

It is important to note that this is an overview of a relatively complex area.  If you would like more detailed guidance on your circumstances in relation to Private Residence Relief or have a specific question on any topic, please contact admin@cooperfaure.co.uk to arrange a consultation.