Mrs Q. purchased a house for £425,000 in June 2007 which she lived in, as her main residence, until September 2008. At that time she moved into her partner's house and let out her own house, having previously been unsuccessful in obtaining a buyer for it. In September 2010, she eventually sold the house for £350,000, a capital loss of £75,000.
She has subsequently purchased another house which she is letting. If the latter house is subsequently sold at a profit, what portion, if any, of the £75,000 loss would be available against the capital gain?
This is a slightly tricky one as it has every complication going. But at the heart of the answer is if/when Private Residence Relief (PRR) can be claimed on the sale of the original residence.
Ordinarily if you were to sell a property any profit which you make is liable to Capital Gains Tax or CGT (currently at a rate of 18% for basic rate income tax payers - and 28% for higher rate income tax payers). However, you do not pay capital gains tax on the sale of your principle residence i.e. where you live – this is known as Private Residence Relief.
Under HMRC rules ''if you make a loss on the disposal of your home and you would have got Private Residence Relief if you had made a gain, your loss will not be an allowable loss and you will not be able to offset it against any gains you have made. If you would have got partial relief, part of your loss will not be allowable and that part should be calculated in the same way as you would have calculated the partial relief if you had made a gainf if you had made a gain''.
Interestingly, a rule under Private Residence Relief often called the ‘’time to sell rule’’ also allows a person to move out of their current home and into their newly purchased house without selling the previous one. As long as they sell the first house within 3 years of vacating it then the sale would be CGT free.
So the question in this instance becomes, that while PRR is clearly applicable up until Mrs Q moved out in September 2008, is PRR applicable during the last two years of ownership when the property was let. And the short answer is yes it is.
Therefore had there been any capital gain on the property PRR would have been applicable meaning it was exempt from CGT. Consequently the loss can not be carried forward.
As an aside I have ignored whether Mrs Q is married and whether her 'partner' is her spouse. I mention this because husband and wife must have the same principal residence. So please bear this in mind.
I hope that helps
Money to the Masses