If you sell a residential property which has been let out or not been your principle private residence for the whole of your ownership you may need to pay Capital Gains Tax, otherwise known as CGT.
Any gain is calculated by adding up:
- The purchase price;
- Plus the associated costs;
- Plus enhancement costs for any expenditure on capital improvements which have not been deducted from rental income; and
- deducting this figure from the net sale price after the costs of estate agents and solicitors
This equals your gain.
If you are a basic rate tax payer you will pay 18% or 28% at the higher rate. Gains add on to your tax status for the year so if the gain is large you may be pushed into a higher bracket.
Living in the property at any point as your Principle Private Residence (PPR), may entitle you to some extra relief. This is known as PPR relief. As ever, there are certain conditions and restrictions:
Full legal or beneficial title must be owned over property. This includes freehold and leasehold.
The property can include a permitted area of 1.25 acres of gardens and grounds including outbuildings unless there is a reasonable case to suggest a larger amount of land is necessary for the proper enjoyment of the property as a residence.
It must be occupied as your PPR, but if you own more than one residential property you live in, you should elect which to claim as your PPR within two years from the date you purchased the second. You may vary this election it if circumstances change and the clock starts ticking again each time you buy a property whilst owning another. Once an election is made HMRC cannot normally challenge your choice.
‘Flipping’ which home you choose is possible but it must reflect reality as HMRC are able to challenge choices and insist upon evidence if you fail to make an election or subsequently vary your choice, or if they can prove it was never lived in as a PPR.
No relief is available if the property was acquired specifically to realise a gain. Any gains arising in order to make a profit would be treated as from a trade and attract Income Tax.
Restrictions apply if any part of the property was used exclusively for a business purpose. This is why, when you work from home it is important to consider how you arrange your office and who pays for what: you or the business!
If you share your home with a tenant some relief for letting out that part is available.
There is a grace period of 9 months when relief can still be claimed if you move before the property has been sold (extending to 36 months if disabled or move to a care home long term).
"A residence is a place where somebody lives" but there is no minimum period of occupation to establish a residence. This is a question of fact and degree with every case decided upon its own particular merits. A residence includes the main building and other buildings within its curtilage if they are occupied for the purpose of the main residence. Outbuildings, staff accommodation, stables and gatehouses may all be included but there are certain restrictions looking at distance and separation from the main dwelling.
If you are married or in a civil partnership you are treated as one unit, meaning you can have only one PPR between you. You can transfer assets between you at no gain, no loss effectively doubling up on the tax free annual exemption but you may need to recreate a declaration of trust showing beneficial ownership has transferred. Beware separation leading to divorce however as special rules apply!
Deadline for reporting CGT on UK residential property
There is a new requirement to report and pay capital gains tax (CGT) on disposals of UK residential property within 30 days of completion. This applies to all disposals made by UK resident taxpayers on or after 6 April 2020.
As a result of COVID-19 the reporting deadline was effectively extended, so that no late filing penalties would apply for transactions completed between 6 April 2020 and 1 July 2020, provided they were reported by 31 July 2020. This extension applies to UK resident taxpayers only. Non-resident taxpayers have been subject to the 30-day reporting regime since 2015.