Capital Gains Tax and renting your house

12 August 2011

taxwallWe don’t like swearing much here on Bitterwallet, but if I tell you that selling your home at a profit (if you should be so lucky) is actually liable to tax at up to 28%, you might tell me to wash my mouth out.

It’s true. Your home is not an exempt asset for Capital Gains Tax (CGT), but there is a relief that wipes out up to 100% of the gain- you are supposed to complete a tax return and claim Principal Private Residence (PPR) relief every time you sell a house at a gain.

For most people, who just buy and live in a house and then sell it, there is no problem. After all, you have occupied the whole house for the whole time you owned it. But what if you have rented some or all of it out?

In yesterday’s article, I pointed out the income tax implications of renting your property, and how you could get £4,250 income tax free under the rent-a-room scheme. But renting your property could have implications for CGT purposes.

If you bought the property as a buy-to-let, then you will not be entitled to claim any PPR relief, as the property was never your home. All of the gain will be chargeable to CGT.

If you lived in the property and then rented it out as a whole, then the proportion of time of your ownership that relates to renting rather than your own occupation is not eligible for PPR relief. For example, if you owned a property for ten years, and rented it out for two, then 20% of the gain will not qualify for PPR relief.

Important Note – if the property was ever your PPR home, then the last three years of ownership will qualify for PPR even if you didn’t live there. So if you rented out your home for the last four years you owned it, only one of those years will not get PPR.

If you only rented out part of your home, for example under the rent-a-room scheme then again, you need to work out the proportion of gain that is not covered by PPR. If you rented out one room out of eight for the last five years of a ten year ownership, then that proportion is one eighth of two tenths (because you still get the last three years), or 2.5% of the gain.

Now 2.5% of the gain being chargeable to tax at a maximum of 28% doesn’t sound a lot, but paying no tax is surely preferable to paying any tax at all. And there is hope. There is an additional PPR relief that exempts gains that relate to the renting out of a property that was once your home, in very simple terms, up to a maximum of £40,000. So unless you have sold a mansion, or it has been rented out far longer than lived in, chances are you *should* be OK.

As ever, Bitterwallet is no substitute for actual, proper tax advice. Well, it is a very good, and best of all, free substitute, but you know what I mean.

TOPICS:   Tax   Mortgages


  • The B.
    "If you lived in the property and then rented it out as a whole" What about the other way around? Do the same rules still apply, i.e. if you bought it as btl and then moved into it before flogging it?
  • Alexis
    Meh. Just keep schtum.
  • Sam T.
    @Bob Yes it would work the other way round. Provided you *actually* moved into it and weren't just saying so for tax avoidance purposes... ;)
  • Works m.
    Tax relief also works for 2 homes - government records aren't well cross-checked and you could always claim that there was a cross-over period between moving out of one home into the other.
  • The B.
    Sam, is there a minimum amont of time? Basically every time you wanted to sell a btl, move into it for 3 months (i.e. the usual amount of time it takes to sell from start to finish) with your nice expensive furniture to make it more appealing to buyers and then flog it. I've always thought that would be the most simplistic loophole in the world.
  • dvdj
    Pretty sure the minimum time is 2years as we're in this situation at the miniute with a property which we've rented out for about 10years.
  • Sam T.
    Sorry @bob @dvdj didn't see the comments til now. Actually there is no statutory minimum amount of time to get PPR and therefore the last 36 months. However, you would generally need to be able to prove you did genuinely live there for a period of time- so things like electoral roll registration, change of bank statement address, utility bills are all good items of papertrail.
  • JJJJ
    Can I just test my understanding. I built a property 18 years ago at a build cost of 20 k (land was gifted by my parents) have spent a considerable amount since ( can I account for this?.) I intend to rent for the next say 10 years Say in ten years time I sell for £200k (providing things stay the same) the following will apply Profit 180k (200 k less build costs of 20K) I can claim 18 years I lived their plus the 3 allowed so 21/28 = 135,000 PPR Leaving 45k, I can claim 40 k additional PPR Leaving 5 k which is less than the current circa 10 k allowed so I would pay nothing ?

What do you think?

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