Your home is exempt from Capital Gains Tax (CGT) when you sell it, In contrast, buy to let properties sold at a profit are liable to CGT. However, in certain circumstances, some or all of the gain on a let property is also tax free. This works best when you let a property which used to be your home, for example you trade up but keep your old house, or a couple move in together and keep both houses, one of which they decide to let. However it can also apply if you acquire a property, let it for a few years and then decide to move into it.
Living in the property gives you access to two reliefs: “letting relief” and “the last 18 months (previously 3 years) of ownership relief”, which would not otherwise be available. Both of these reliefs reduce the gain on which you have to pay tax.
The last 18 months rule is simple: it states that if you have used the house as your main residence for some time during your period of ownership, then the last 18 months of ownership as well as the period of occupation are free of tax. So if you own a house for 10 years and live in it for 1 year, potentially 2.5/10 of the profit on sale will be tax free.
Letting relief is more complicated as it is limited to the lower of three figures, two of which cannot be calculated until the selling price of the house is known. The third figure is an absolute cap of £40,000, which if the property has been owned for a significant period, often tends to be the relevant figure.
So if the gain on our 10 year owned house is £100,000, £25,000 could be exempt by virtue of the occupation and £40,000 could be exempt due to letting relief. If your annual CGT exemption of £1,100 was available this would reduce the taxable amount to just £23,900.
Have a question? Contact Jane Swain.
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