Tax is a difficult topic. Individual circumstances are always different and for detailed advice you need a tax advisor. However this introduction to some basic principles could be helpful in guiding you to the issues you should bear in mind.
Private residence relief ensures that when you dispose of your flat you will not (subject to a few exceptions) pay capital gains tax on any gain you make.
You need to appreciate that private residence relief is not intended to avoid tax on gains you make which are speculative or arise from property development. So if you buy a flat and refurbish it and then sell it at a profit do not expect to get private residence relief. Similarly if you bought a flat in December with a view to selling it at a profit in February, do not expect the Inland Revenue to be sympathetic to your claim even if you have lived there for a short time. Suppose you are a sitting tenant and you managed to get a long lease at an advantageous price and you then sell the lease on at a profit – again you could expect problems if you claim private residence relief on the profit.
Remember also that if you make a loss when you sell your flat in a situation where you would not have paid any tax if you had made a profit, then your loss will not be allowable against other profits.
To qualify for this tax relief your flat must have been at some time in your period of ownership your only or main residence. If your flat is outside the UK you may still qualify for relief. If you have more than one home, a flat in town and one in the country, you can only get relief on your main flat and you can choose which one it is.
If you use your flat for business purposes (which quite likely Will be a breach of your lease anyway) then, again, you may expect some difficulty with the Inland Revenue if they are able to establish what you have been doing and in your Tax Returns you may have been claiming for business expenses at your flat which could give them a clue as to what has been happening.
You are entitled to tax relief to the extent that your flat was used as your own main residence during your period of ownership and your period of ownership begins on the date when you first acquired the flat, or on 31st March 1982 if that is later, and it ends when you dispose of the flat. The last 36 months of your period of ownership always qualify for relief regardless of how you use the flat at the time if the flat has at some time been your only or main residence. When calculating the proportion of the claim which qualifies for tax relief you take the fraction of the periods of occupation including the final 36 months where appropriate over the period of ownership, both periods starting at 31st March 1982 if the flat was owned before that date.
Even if you have to live away from your flat some periods of absence will still qualify for relief. If you do not occupy your flat when you acquire it because you have not been able to sell your own home or you have to carry out refurbishments you can treat the first 12 months as if the flat had been your only or main residence in that period. Exceptionally the Inland Revenue may allow you to treat a longer period up to a total of 2 years in the same way. If you are away from your flat and during that period you have no other home eligible for relief, and both before and after the period there is a time when the flat is your only or main residence, then such period can also be treated as a period of residence.
The qualifying periods of absence are absences for whatever reason which are not more than 3 years in total, absences in which you are in employment and all your duties are carried on outside the UK, and absences totalling not more than 4 years when the distance from your place of work prevents you from living at your flat or your employer requires you to work away from your flat in order to do your job effectively. You will keep your job related absences as qualifying if you cannot return to your flat afterwards because your existing job requires you to work away again.
Suppose you live in a flat in town for the benefit of your job but you also have a house outside London which you occupy as your main residence. You may nominate which of the two abodes is to be your main residence. Relief is still available even if you never actually live in the house. For accommodation to be job related there must be a term in a contract that requires you to live in the flat.
Sometimes firms in London, particularly in the leisure industry, own accommodation where the employee has to live in order to carry on a particular job. Where you have let part of your flat then there is partial capital gains tax relief according to certain guidelines. If you are married and you are not separated from your spouse you can only have one main residence between you. If, when you married, you each owned a flat and you have continued to use both flats you can nominate jointly which is to be the main residence. You have a 2-year period in which to make the nomination and the two years begins on the date of the marriage. If you are separated then each of you may have a different flat and each may be entitled to relief on any gains arising on the disposal of their particular flat.
It is important to remember that in addition you may be entitled to relief when you dispose of a flat which you have provided for a dependent relative provided that that relative lives there rent free as the dependent relative’s only residence. Obviously there are some more detailed rules to be looked at but if you think this could be relevant then you can follow this up with your tax advisor. These rules, of which only a summary has been given, do provide opportunities for saving tax. If you are in the buy-to-let business as a higher rate taxpayer then your capital gains tax is at 40% on the profits. Basic rate taxpayers pay 20%. If you use the nomination rule mentioned above and have at some point lived in the flat you can make a tax saving. As long as you are within the time limit you can change your mind and elect for the other property.
Suppose you bought a flat 5 years ago for £75,000 and you are now selling it for £140,000 taper relief will have reduced the chargeable gains. However, if you make your election within the 2 year time limit you could nominate this flat as your principal residence instead of the flat where you are presently living. Even if the nomination is for a very short period the last 3 years will be free of capital gains tax and if you bought your second flat within a 3 year period then you may well avoid tax altogether. In fact if you let your rented flat for 3 years and then moved back for a very short period and then let it again for up to 3 years you could very largely avoid capital gains tax completely. That is the theory. The practice may be more difficult. The important point is to get the appropriate tax advice, sooner rather than later, where your position is not completely straightforward. It can often save you a considerable sum of money.
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