How to Move Back Into a Rental Property to Avoid Capital Gains Tax in the UK

Move Back Into Your Rental Property to Avoid Capital Gains Tax in the UK: A Guide

When selling a rental property in the UK, capital gains tax (CGT) can significantly reduce your profits. However, moving back into your rental property before selling may help you reduce or avoid CGT altogether by making use of Private Residence Relief (PRR). This strategy can be a valuable tax-saving option for property owners.

This guide will explain how capital gains tax works on rental properties, how moving back into the property can help you claim relief, and what you need to know to maximise your tax savings. We will also show how Fraser Bond can assist you in making informed decisions about your property investments.

What is Capital Gains Tax (CGT)?

Capital gains tax is a tax on the profit made when you sell or dispose of an asset that has increased in value, such as property. For landlords or property investors, selling a rental property can result in a significant CGT bill, as you are required to pay tax on the gain in value of the property during the period it was rented out.

In the UK, CGT rates for property are higher than for other assets. The tax rates on the profit made from selling residential property are:

• 18% for basic rate taxpayers
• 28% for higher and additional rate taxpayers

However, property owners can reduce their CGT liability through tax reliefs, including Private Residence Relief (PRR) and Letting Relief.

How Moving Back Into Your Rental Property Helps Reduce CGT

One way to reduce your CGT bill is to move back into your rental property and make it your primary residence. This allows you to qualify for Private Residence Relief, which reduces the capital gains on the property for the period it was your main home.

How Private Residence Relief (PRR) Works

Private Residence Relief (PRR) is available to UK homeowners when they sell their primary residence. It allows you to avoid paying CGT on any gain made during the time you lived in the property as your main home.

For rental properties, PRR can be claimed for two specific periods:

1. When you lived in the property before renting it out: If you lived in the property as your primary residence before renting it, the period you lived there is covered by PRR.
2. If you move back in before selling: By moving back into the property and living in it as your main home, you can claim PRR for the time you occupy the property before selling. Additionally, you will receive relief for the final 9 months of ownership, even if you are not living in the property during that time.

Example of How PRR Can Reduce CGT

Let’s look at an example to illustrate how moving back into your rental property can help reduce your CGT liability.

• You bought a property in London in 2006 for £300,000 and lived in it for 5 years.
• In 2011, you moved out and rented it out for 9 years.
• The property is now worth £600,000, meaning you’ve made a gain of £300,000.

In this example, you’ve lived in the property for 5 out of the 14 years of ownership. If you now move back in and live there for an additional 1 year before selling, you can claim Private Residence Relief for:

• The 5 years you originally lived there,
• The 1 year after moving back in, and
• The final 9 months of ownership (which is automatically covered by PRR).

This means 6 years and 9 months of ownership are exempt from CGT. You would only pay CGT on the gain made during the rental period, reduced by the time you lived there and the final 9 months.

Additional Letting Relief

In addition to PRR, property owners may also qualify for Letting Relief if they lived in the property before renting it out. Letting Relief can reduce your CGT by up to £40,000 (or £80,000 for couples), depending on the size of the gain.

However, it’s important to note that Letting Relief is only available if you once lived in the property as your main home. Letting Relief can be applied to the part of the capital gain that falls under the rental period, reducing the overall CGT liability even further.

How Long Do You Need to Live in the Property to Qualify?

The duration of your occupancy is a key factor when it comes to qualifying for PRR. While there is no minimum legal requirement on how long you need to live in the property, HMRC expects that you genuinely intend to make the property your primary residence. Moving in solely to avoid CGT, without genuine occupancy, could result in your claim being denied.

To maximise your chances of successfully claiming PRR, you should:

• Change your address on official documents (e.g., driving licence, council tax).
• Register for utilities and other services at the property.
• Stay in the property for a reasonable period (at least 6 to 12 months) before selling.

Other Strategies to Minimise CGT

In addition to moving back into the property, there are other strategies that can help reduce CGT when selling a rental property:

1. Use Your CGT Allowance
   Every individual in the UK has an annual capital gains tax allowance, which currently stands at £6,000 for the 2023-24 tax year. If you own the property jointly with a spouse or civil partner, you can combine your allowances to exempt £12,000 of gains from tax.

2. Plan the Timing of Your Sale
   If you expect your income to be lower in a future tax year (e.g., after retirement), it might be beneficial to delay the sale to pay CGT at the basic rate rather than the higher rate.

3. Offsetting Losses
   If you have made losses on other investments, you can offset these against the capital gain from the sale of your property, reducing your CGT liability.

How Fraser Bond Can Help You

At Fraser Bond, we specialise in providing property owners with expert advice on property sales and tax planning. Here’s how we can assist you:

• Property Valuation: We provide accurate property valuations to help you understand the potential gain and CGT liability on your property.
• Strategic Planning: Our team can advise you on the best timing for the sale and whether moving back into your property is the right option for reducing CGT.
• Sale Process Support: We handle all aspects of the sale process, from finding buyers to negotiating offers, ensuring a smooth and fast transaction.

Conclusion

Moving back into your rental property can be a smart way to reduce or avoid capital gains tax when selling in the UK. By qualifying for Private Residence Relief and potentially Letting Relief, you can significantly reduce your tax bill. However, this strategy requires careful planning to ensure you meet HMRC requirements and fully benefit from available reliefs.

If you’re considering selling your rental property and want to minimise your capital gains tax liability, Fraser Bond can provide expert advice and support throughout the process. Contact us today for a consultation and let us help you maximise your property’s value while reducing your tax burden.