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.
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:
However, property owners can reduce their CGT liability through tax reliefs, including Private Residence Relief (PRR) and Letting Relief.
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.
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:
Let’s look at an example to illustrate how moving back into your rental property can help reduce your CGT liability.
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:
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.
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.
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:
In addition to moving back into the property, there are other strategies that can help reduce CGT when selling a rental property:
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.
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.
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.
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:
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.
