I Lived There for Years, So Surely There’s No Capital Gains Tax?

This is a conversation I’ve had many times.

Someone bought a property as their home.

They lived there for several years, perhaps moved in with a partner or bought another property, and rather than selling the original house, they decided to rent it out.

Ten or fifteen years later, they decide to sell.

Then comes the question:

“But it was my home, Jonathan. Surely I don’t have to pay Capital Gains Tax?”

Unfortunately, the answer isn’t always quite that simple.

The fact that a property was once your main home can be extremely important for Capital Gains Tax purposes.

But it doesn’t necessarily mean the whole gain will be tax-free.

But I genuinely lived there.

That matters.

Principal Private Residence Relief, often referred to as PPR relief, can provide valuable Capital Gains Tax relief for periods when a property has been your main residence.

If you bought a house, lived in it as your genuine home and later sold it, the position may be relatively straightforward.

But if you moved out and retained the property for a number of years before selling it, we need to look at the whole period of ownership.

When did you buy it?

When did you move in?

When did you move out?

What happened to the property afterwards?

And when was it eventually sold?

Those dates can become very important.

The lesson? - A property having once been your home doesn’t automatically make the entire gain tax-free.

I rented it out after I moved.

This is probably the scenario we see most often.

Perhaps you bought your first flat in your twenties.

A few years later you bought a house with your partner but decided to keep the flat as an investment.

It was then rented out for another ten years.

When the flat is eventually sold, the Capital Gains Tax calculation needs to reflect its history.

Part of the ownership period may qualify for relief because it was your home.

Other periods may not.

The calculation can therefore be quite different from simply taking the sale price, deducting the original purchase price and taxing everything in between.

The lesson? - The history of the property matters.

What if I moved back in before selling it?

This is another question that comes up surprisingly often.

Sometimes someone has heard that moving back into a property before selling it will make the gain tax-free.

Simply spending a short period at the property before a sale doesn’t necessarily produce the result someone expects.

Whether a property is genuinely someone's residence depends on the facts and circumstances.

Tax planning based on moving into a property for a short period purely to obtain relief needs to be approached with considerable care.

The lesson? - Living somewhere and establishing it as your genuine residence are not necessarily the same thing.

I've owned it for years. How do we work out the gain?

This is where records become important.

The starting point will usually involve establishing what you paid for the property and what you sold it for.

But that isn't necessarily the end of the calculation.

There may be certain costs connected with buying and selling the property that can be taken into account.

Some expenditure on improving the property may also be relevant.

The difficulty is that someone who bought a property twenty years ago may no longer have all the paperwork.

That's why I always encourage property owners to retain records of significant expenditure.

A new kitchen because the old one wore out and an extension that substantially altered the property aren't necessarily treated in the same way for Capital Gains Tax purposes.

The lesson? - Keep the paperwork.

When do I have to tell HMRC?

This is one of the areas where getting advice before the sale can be particularly useful.

Where Capital Gains Tax is due on the disposal of UK residential property, there can be a relatively short period in which the disposal needs to be reported and the tax paid.

Unfortunately, people sometimes discover this only after their solicitor has completed the sale and the proceeds are already sitting in their bank account.

That's another reason I prefer clients to ask the tax question before completion rather than afterwards.

Jonathan’s Tip

If you’re thinking about selling a property that was once your home but has subsequently been rented out, start gathering the history before you put it on the market.

Find:

• the original purchase documents

• the dates you lived in the property

• the date it first became rented

• records of significant improvements

• details of any periods when you moved back in

• an idea of the likely selling price

With that information, we can usually get a much clearer picture of the potential Capital Gains Tax position before the sale takes place.

Further reading

If you're considering selling a property that was previously your home, you may also find these articles useful:

• Capital Gains Tax on Property in the UK: Rules Many Owners Misunderstand

• Principal Private Residence Relief: Common Capital Gains Tax Misunderstandings

How we can help

At Tax Matters, we regularly advise clients who are selling properties with a more complicated ownership history.

Sometimes the property was previously the family home.

Sometimes it has been rented for many years.

Sometimes ownership has changed between spouses or family members.

And sometimes the client simply wants to know how much tax they are likely to pay before deciding whether to sell.

We can review the history of the property, calculate the potential gain, consider the reliefs that may be available and deal with the relevant reporting to HMRC.

A final thought

Property tax rarely starts with the sale price.

It starts with the story of the property.

When did you buy it?

When did you live there?

When did you move out?

What happened afterwards?

Those details can make a significant difference to the Capital Gains Tax position.

So if you're thinking about selling a property that was once your home, don't simply assume that the gain will be tax-free because you lived there many years ago.

Find the paperwork, establish the history and ask the question before you sell.

If you're considering selling a former home or rental property and would like to understand the Capital Gains Tax position beforehand, my team and I would be pleased to help.