In the past when you wanted to buy a new house you simply sold the old one. Now, its not that simple and many people are looking to retain their former house, either for financial reasons (so they can benefit from a rising property market) or personal reasons (in that they may wish to occupy the property again).

There are a number of factors that will need to be considered when weighing up whether you should simply sell the property or retain it, however how you’ll be taxed may be crucial. As well as if you should sell the property a related question is when you should sell the property. For example it’s common to keep a property and let it out for a few years after you’ve bought your new one. But in tax terms is there a definite time that you should sell this - or does it not matter if you just carry on renting it out right up until you decide to sell it?

Capital gains tax (’CGT’)

If you sold the property, after you moved out principal private residence (’PPR’) relief would cover any gain arising in full. If you decided to let the property for a number of years before disposal you may be liable to capital gains tax on the disposal dependent on the number of years absence and the gain arising.

Where an individual has occupied a property as a residence for only part of his period of ownership then a proportion of the capital gain resulting on the disposal of the property is exempt. This is calculated on the following basis:

Capital gain x period of occupation/period of ownership

In addition to the period that an individual actually occupies a property as his residence, when calculating the period of occupation there are certain deemed periods of occupation which are allowed to be taken into account.

The last 36 months of ownership would always be deemed to be occupied by you irrespective of the use of the property during this period.

There are also more ‘deemed periods of occupation’ that you could be entitled to although the qualifying conditions for these are much stricter. If you go overseas under a contract of employment, occupy the property as a main residence both before and after your period of absence, and have no other residence overseas, the entire period of absence overseas would be deemed occupation. The main time this would be likely to apply would be where you worked overseas and lived in employer provided accommodation.

If the property was let then you wouldn’t be able to establish the property as your main residence for this period. However, another form of relief is also available.

Lettings relief provides for an exemption from CGT for that part of the gain attributable to the letting in so far as it does not exceed the lower of:



 

the tax free part of the gain under the PPR relief

£40,000.



Therefore the position in terms of timing would be:



 

If you were to sell the property within three years of ceasing to occupy it any gain arising would be fully covered by PPR relief.

If you left it for more than three years but did not let it out, you’d qualify for partial PPR relief that would eliminate part of the remaining gain.

If you left it for more than three years but did let it out you’d qualify for partial PPR relief and lettings relief which may well eliminate the remaining gain in any case.



You should also bear in mind that you would be able to claim the annual CGT exemption which could eliminate any small gain remaining.

Capital loss

In the unfortunate event that you sold the property at a loss, a loss on a main residence would not be an allowable capital loss and therefore couldn’t be offset against income or gains.

Rate of CGT

The rate of CGT is now 18%.

Rental income

If you decide to rent the property out you will be subject to income tax on the rental ‘profit’.

When calculating the rental profit, you are permitted to deduct any expenses incurred ‘wholly and exclusively’ for the purpose of the letting business. Under tax law, you are regarded as carrying on a business of letting properties.

Therefore typical expenses that you will obtain a deduction for are:



 

Repairs to the let property

Insurance

Any utility bills

Interest on a loan/mortgage used for the property.

Note its only the interest on the mortgage that would be an allowable expense -and not the full capital repayment element of the payment.





If you incurred a rental loss this would be offset against any future rental profits arising.

Furnished v Unfurnished

There are few differences from a tax perspective whether a property is let furnished or unfurnished. The main one is that a furnished property would be entitled to the wear and tear allowance. This is a 10% reduction in the net rental income, and this could therefore result in a lower income tax charge.

Transfer to a company

A common question is whether a transfer to a company will yield any benefits.

The transfer to a UK company would realise a gain although this would be fully covered by PPR relief. On a future disposal by the company any uplift in the value of the property would be taxed in the UK company even if the disposal was only in 12 months time. You could retain ownership of the property but simply use the company just in a management capacity. This would enable some of the rent to effectively be diverted to the UK company, to be taxed at 21%. The tax saving would however be marginal unless you planned to retain the funds within the company (we have covered the use of a property service company in a separate article).

You could consider using an offshore company, however this would not offer any real advantages unless the company was controlled from overseas. If it was controlled in the UK, it would be UK resident and as such fully charged to UK corporation tax just as for a UK company.

If you could establish an overseas controlled company that traded overseas, this could be beneficial to divert part of the rental income into a tax free entity.

Emigration

You could also consider emigrating overseas. You would still be liable to UK income tax on the rental income, however providing your absence overseas was for at least five complete tax years you would not be liable to UK CGT on a disposal of the property.

Summary

When you’re considering whether to rent or sell your home, the key time period, will be the three years after you move out. Provided you sell the property within this period any gain would be automatically exempt from CGT.

If you wanted to rent it long term, ie for more than this three year period, it would then be useful to undertake an estimated CGT calculation to see if any CGT would be payable. Although you’re entitled to lettings relief as well as the annual CGT exemption these reliefs may not cover the gain arising, particularly where the gain is large.



Rent Back