Anna is concerned about the capital gains tax position on her house when she sells it. She is currently living abroad, having left the UK to be with her husband. They married soon after leaving the UK.
She has been letting her house since they went abroad. She intends to sell it in due course but is getting a good rental income and would rather sell it at her leisure when she returns to the UK.
Anna has been told that she will not benefit from capital gains tax exemption on her home now that she is married and is letting the property. She has also been told that there is no capital gains tax to pay if she sells while abroad. How should she proceed?
There is a certain amount of truth in what she has been told but timing is important. Anna left the UK in April 2002 so, if she returns as anticipated in 2005, she will not have been not resident and not ordinarily resident for more than the required five years. This means that she will remain temporarily non-resident and will not escape capital gains tax on the house if she sells while she is abroad.
Furthermore, she is not living in a country in which the double-taxation agreement helps, such as Belgium.
The rules applying to the house for capital gains tax purposes are quite complicated and confusing but there are a few possible ways in which principal private residence relief can work.
If she sells the house in about December 2005 (her best guess for timing) she will have owned it for roughly seven years. Anna is hoping that when all costs are taken into account, she will clear a gain of about £150,000. This is why she is worried about the potential capital gains tax liability. She is a higher-rate taxpayer so the tax could be about £40,000 when annual exemptions and taper relief are taken into account.
Anna will not lose the principal private residence relief entirely because she has got married. It is clear that her house is no longer her principal private residence as she is living with her husband and will do so when they return to the UK but it was certainly her home for the first couple of years of her ownership.
The last 36 months of ownership are also included as a period of residence within the exemption. If, for some reason, one has not occupied one's house for a period during ownership, the last 36 months are taken as being exempt.
In Anna's case, the first two years and the last three years will therefore count as being exempt so it is largely going to be a period of about two years in the middle, when she moved abroad and started letting the house, that needs to be covered.
There are various other exemptions for periods of non-occupation that can be considered, such as when someone moves abroad for reasons such as employment. Anna could qualify because of her husband's work abroad.
Essentially, however, the house has to be the principal private residence at some time before and after the period abroad and this is obviously unlikely to apply.
We also discussed whether or not the house is more useful than her husband's in capital gains tax terms, in which case they could live there for a period before selling it but Anna confirmed that her husband's house will definitely be their home when they return to the UK.
There is, however, another exemption which applies to rented property. In principle, you can get relief from capital gains tax where the property has been let. The gain will be reduced by the lesser of the amount of relief due for actual residence or £40,000. The relief cannot be more than the gain itself, though, and you cannot create a loss.
So we have seen that she has already effectively got relief through residence for 60 months out of the ownership of 84 months so roughly £107,000 of the potential gain of £150,000 is exempt. The remaining 24/84ths of the gain of £150,000 would be nearly £43,000, however.
There would be £40,000 of relief under the let property rules. This is because this figure is lower than her residence relief of £107,000. This means that, after these various reliefs, there is about £3,000 of gain that remains to be charged to capital gains tax. If her annual exemption for the year does not cover this, taper relief will because she has owned the house for seven years.
The important thing is that Anna could have some leeway as far as timing is concerned for selling the house.