Can I escape a tax bill on the sale of our rental home?

First published by The Times here.

Question:

In 2015 I sold my main home and moved in with my partner. Using some of the proceeds from the sale we bought another property in 2016 in joint names, with me providing a 50 per cent deposit and my partner funding the rest with a buy-to-let mortgage. We let it after refurbishment later in the year, sharing the rental income and costs, etc.

We are now considering selling, due in part to the legislation introduced by the government. From a capital gains perspective, my partner recognises that she will have to pay tax when it is sold. However, as I have no other property, would the rental be classed as my main residence, thus exempting me from capital gains tax, or would I still be liable?

Nimesh responds:

Your question is not uncommon, as many people look to legitimately reduce their capital gains tax liability on property disposals. Unfortunately, the position here is unlikely to be as favourable as hoped — although there are some planning options worth considering, albeit with a few health warnings for your relationship.

For a property to qualify for principal private residence (PPR) relief — the exemption that can remove or reduce capital gains tax — it must have been your genuine main residence during your period of ownership. This is a question of fact, not simply ownership. HM Revenue & Customs will look at where you actually lived: where your belongings were, where you were registered to vote and your correspondence address.

You’ve said that since 2015 you have lived with your partner in her home, while the jointly owned property bought in 2016 has always been let. On those facts, it is difficult to argue that the rental property has ever been your main residence.

The fact that you do not own another property in your sole name is not relevant — a property does not qualify for PPR “by default”; it must be occupied as your home.

When the rental property is sold, both you and your partner will be subject to capital gains tax on your respective shares of the gain. The gain is broadly the sale proceeds less the purchase price and allowable costs (such as stamp duty, legal fees and capital improvements). After deducting your annual exemption (£3,000), gains are taxed at 18 per cent or 24 per cent, depending on your income tax bracket. The tax must be reported and paid within 60 days of completion.

So, what could you do to improve your position?

If you were to move into the rental property and genuinely occupy it as your home, your share could start to qualify for PPR relief from that point onwards. This would not exempt the whole gain, but it could shelter the portion relating to your period of occupation, plus the final nine months of ownership.

As you are not married or in a civil partnership, you and your partner are treated independently for capital gains tax purposes. There is no rule that you must have only one main residence between you. In principle, this means you could live in the rental property and claim PPR relief there, while your partner could continue to occupy her home and retain full relief on that property.

However, this must reflect reality. HMRC will not accept a token or short-lived move designed purely to access relief. You would need to demonstrate that the rental property has genuinely become your home — for example, by changing your correspondence address and living there as your main base for a meaningful period.

You also need to consider your partner. If you move into the rental property while she remains in her home, you would be living apart.

In the interest of romance, both of you could move into the rental property for a period, before later returning to her home. This can achieve two things: your occupation would create PPR relief entitlement on the rental property, while your partner may still preserve full PPR relief on her own home through the “deemed occupation” rules. This means that an absence of up to three years for any reason can still qualify as a period of occupation, provided the property was her main residence both before and after that absence.

That said, timing and evidence are critical. The occupation must be genuine, and your partner must reoccupy her property within the permitted time frame to retain full relief.

In summary, while the current position points clearly to a capital gains tax liability for both of you, there are planning opportunities to mitigate the exposure. These rely on genuine changes in living arrangements and careful coordination — and moving home, potentially twice, purely for tax reasons is not always practical or desirable.