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This post outlines a number of additional reliefs that are available, which can help to reduce the CGT liability further in certain scenarios. Please Note: From April 2015 the rules applying when a non UK resident sells a UK residential property, and the rules for UK capital gains tax when he does so, have changed.
How To Claim An Additional Three Years Of PPR (Principal private residence relief)
If you live in a property and then vacate it but return to live in the property again, you can claim up to three years’ relief. This is known as the three years’ absence relief. It is not necessary for the property to have been rented out during the period that it was vacated. However, for the three years’ absence relief (sandwiched between periods of actual residence) it does matter if another property was your PPR during those three years, i.e. both properties cannot be your PPR at the same time.
Example – Claiming Additional Three Years’ Absence Relief
John buys a two-bedroom property in Manchester in 1985 for £45,000 and lives in it for 10 years.
He then rents a two-bedroom house in London in 1995. He decides to rent out the house in Manchester.
He moves back to Manchester in 1998 (after three years). For the period 1995- 1998, John informs HMRC that the Manchester house was his elected main residence, since he was renting in London.
When John moves back to Manchester he lives there for an additional three years and then sells the property in 2001 for £250,000.
This means that the property ownership can be summarised as follows:
- 1985 to 1995 he lived in the property
- 1995 to 1998 he rented out the property
- 1998 to 2001 he returned to live in the property again
This means that John has no CGT liability when he sells the property.
This is because for thirteen years the property was his main residence. Also, he is able to claim the three years’ absence relief when the property was rented out. Therefore, John has made a £205,000 tax-free capital profit!
Claiming PPR When Working Overseas
If you lived in a property and your employer required you to work overseas, then the period that you spent working overseas can also be claimed as residential relief. This relief can be claimed if you return to the same property and make it your main residence again. The time that you spent working overseas is irrelevant.
However, you can only claim this relief if no other residence qualifies for relief during the absence, i.e., you had no other nominated PPR.
Example claiming PPR overseas
Alex buys a two-bedroom house in 1990 for £130,000.
He works as an IT consultant, and in 1992 he is asked to work on a three-year project in the United States. He jumps at the opportunity and decides to let his property whilst working overseas. His work permit is extended and he returns to live in the house in 1999, after seven years.
For the period 1992-1999, Alex informs HMRC that the two-bedroom house was his elected main residence.
In 2003 he is offered a permanent position in the United States, which he accepts, so he decides to sell his UK property. He has it valued at £300,000.
Alex will have no CGT liability because:
- between 1990 and 1992 he lived in the property, so there is no CGT liability;
- between 1992 and 1999 he could still claim residence relief as he was working outside the country;
- between 1999 and 2003 the property was again his main residence.
Note: Even if Alex had bought a property in the United States in 1992, since he elected for the UK property to be his PPR, he could still claim relief on the UK property under both overseas employment relief and the last three years’ ownership relief. If he had not elected to make the UK property his PPR, then he could not claim relief for the years 1992-1999.
Claiming PPR When Re-locating In The UK
If you live in a property and then your employer requires you to work elsewhere in the UK, then you can claim up to four years’ relief. You must return to the property and make it your main residence again.
However, you can only claim this relief if no other residence qualifies for relief during the absence, i.e., you had no other nominated PPR.
Example claiming PPR when re-locating
John works as an IT consultant. As part of his employment contract, he works at different customer locations throughout the country.
He lives in North Wales, in a house he purchased in 1995 for £60,000. However, he is assigned to a long-term project in London in 1999.
His company provides him with rented accommodation in London, so he decides to live there for the duration of the project.
Because he will be vacating his house in North Wales, he decides to rent it out for an annual rental income of £5,000. He is liable to pay income tax on his rental profits.
John finishes his assignment in London and returns to his house in North Wales in January 2003. For the period 1999-2003, John informs HMRC that the two-bedroom house was his elected main residence.
After returning to North Wales he lives in his house for a year but then decides to move back to London on a more permanent basis.
His house is valued at £160,000 in February 2004. John will have no CGT liability because:
- between 1995 and 1998 he lived in the property, so there is no CGT liability;
- between 1999 and 2003 the duties of UK employment required him to live elsewhere and there was no other property that was his PPR;
- from January 2003 to February 2004 he lived in the property, so there is no CGT liability.
CGT Implications Of Providing Property To Dependent Relatives
There is no principal private residence relief available to an owner if he doesn’t live in the property but his relatives do.
However, if someone owned a property on 5 April 1988 that has been continuously occupied rent-free by a dependant relative since that date, the property is exempt from CGT when the owner disposes of it.
Dependant relative is defined as the owner’s own or the owner’s spouse’s widowed mother or any other relative unable to look after themselves because of old age or infirmity. There is another possibly tax effective way of providing a home for a relative: by acquiring a property, putting it into trust, and allowing the relative to live in it rentfree for life. However, this is a simplification of the subject, and professional advice must be sought.
