Restriction to private residence relief on sale of former residence

Restriction to private residence relief on sale of former residence

Where a property has been an owner’s only or main residence throughout the whole period of ownership, private residence relief will be available on the capital gain arising on sale.  However, where a property has not been occupied as the owner’s only or main residence throughout the period of ownership, private residence relief may only be available for a proportion of the gain. 

When calculating the proportion of the gain eligible for private residence relief, the last 36 months of the period of ownership are currently exempt.  However, in the Autumn Statement 2013 the Chancellor has announced that the final period of exemption will be reduced from 36 months to 18 months with effect from April 2014.

The examples below demonstrate how you may be affected by this announcement:

Example 1

Mr A acquired a house on 31 January 2004 and lived in it as his main residence until 31 January 2009.  He moves into a new house which became his main residence but retained the first property as a second home.  The first property was sold on 31 January 2014 at a gain of £100,000.

Mr A is entitled to private residence relief for eight years (five years of residence plus the final 36 months) out of the ten years period of ownership, so £80,000 of the gain qualifies for private residence relief.  The chargeable gain of Mr A is £20,000.

Example 2

Ms B acquired a house on 31 July 2004 and lived in it as her main residence until
31 July 2009.  She moves into a new house which became her main residence but retained the first property as a second home.  The first property was sold on 31 July 2014 at a gain of £100,000.

Ms B is entitled to private residence relief for 6 ½ years (five years of residence plus the final 18 months) out of the ten years period of ownership, so only £65,000 of the gain qualifies for private residence relief.  The chargeable gain of Mrs B is £35,000.

Clearly the decision to sell a property will depend upon many factors, but this may be an added incentive for some owners to make the sale before April 2014, although if the property were to be sold at a loss, a sale after April 2014 would increase the allowable loss.