Property and Capital Gains Tax

If you are planning to purchase a property, either as a second home or as a buy to let investment, it is important to understand the potential Capital Gains Tax liabilities that may arise when selling that property in the future.

Capital Gains Tax on a home

As long as the property you give away or sell is your main home, Capital Gains Tax (CGT) will not be payable.

However, if you give away or sell a second property that you do not live in as your main home, CGT may be payable if the property has increased in value between when you first owned (or inherited) it and when you give it away/sell it.

You do not usually have to pay CGT when you sell or dispose of your own home. This is because you get a relief called Private Residence Relief. You may have to pay CGT if you own more than one home as it would only be available for one residence.

If you gift (or sell at undervalue) a property that is not your main residence to a “connected person”, then for tax purposes it will still be treated as if you sold the property to them at full market rate. A connected person is a spouse, civil partner, parents, grandparents, children, grandchildren, siblings and legal partners of these people.

If a sale is between unconnected persons, then there is a presumption that the transaction is at arm’s length and that the price paid is the best amount the seller is able to obtain from the buyer.

What is Private Residence Relief (“PRR”)?

When you sell or dispose of your own home you will not have to pay any CGT if you satisfy the required conditions. The relief is available if the property you are selling has been occupied by you as your private residence through the period of ownership.

You may also qualify for this relief if you sell part of the garden without selling your home at the same time.

Owning more than one home

If you live in – not just own – more than one property, you can ‘nominate’ one as your main home. You will need to write to HM Revenue & Customs (HMRC) to tell them which one you nominate as your main home. You must sign your nomination. You must make your nomination within two years of the date you first have a particular combination of residences. You should make a new nomination whenever the number of homes you live in changes. If you do not make a nomination, HMRC will decide which property to treat as your main home based on the facts.

Is it a residence?

A fundamental requirement for the above election is that the relevant property is a residence of the individual. Unfortunately, there is no statutory definition of ‘residence’ for these purposes.

Factors considered when assessing if the property is your ‘residence’ include the amount of time spent in each of the properties, the degree of continuity and permanence, the expectation of continuity, the furnishings and possessions, the activities carried on, the timing and council tax elections. Should evidence supporting these factors not be sufficient to amount to a ‘residence’, then the owner will not be able to PRR on the sale/disposal of the property.

PRR is only available on the disposal of a dwelling house that has been the individual’s only or main residence at some point. Any property subject to a main residence election must also satisfy a residence requirement, i.e. the election must be between dwelling houses that are both residences; the election is not a ‘magic pill’ that of itself transforms an occupied property into a residence.

Tax relief if you own more than one home

Married couples and civil partners can have only one main home between them, but unmarried couples can each nominate a different home to be their main residence.

Tax relief if you let out your home

If you have let out part or all of your home, when you sell it, a proportion of any gain will relate to the letting and could be taxable.

However, provided the home genuinely has been your main home at some point, you can claim tax relief for the time it was your main residence, plus the past 18 months of ownership. However, for any disposals after 6 April 2020 the period was reduced to 9 months.

You may also be able to reduce the CGT due by claiming letting relief.

Capital Gains Tax rates and annual tax-free allowances

Each tax year nearly everyone who is liable to Capital Gains Tax gets an annual tax-free allowance – known as the ‘Annual Exempt Amount’. You only pay CGT if your overall gains for the tax year (after deducting any losses and applying any reliefs) are above this amount. For the tax years 2020/2021 and 2021/2022 this amount is £12,300.

If you are a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets. To the extent where the chargeable gain arises from the sale or disposal of residential property, the CGT rates are: 18% where the gain is within the ‘basic rate band’; and 28% to the extent that any part of the gain is above the basic rate band. The basic rate band is currently £37,500, therefore if your aggregate taxable income and chargeable gain falls within that then you would pay the lower CGT rate. If over the basic rate band, the higher CGT rate would apply.

Paying the CGT on property disposals

If you sell residential property in the UK on or after 6 April 2020, you must report and pay any tax due within 30 days of selling it. You may have to pay interest and a penalty if you do not report gains on UK property within 30 days of selling it.

Disclaimer

This note is written as a general guide only. It is not intended to be comprehensive or to provide any specific legal advice and should not be acted upon or relied upon as doing so. For detailed advice about your own legal and tax position, please contact your usual Private Client adviser at Thackray Williams LLP.