For those lucky enough to have more than one property in their portfolio, understanding the ins and outs of Capital Gains Tax (CGT) becomes essential, especially when considering selling one of these assets.
When you’re considering selling a residential property in the UK that isn’t your main home, you’ll find yourself under the spotlight of HM Revenue & Customs (HMRC). However, with a keen eye on current regulations and available reliefs, you can strategically plan your tax affairs to mitigate your liability.
So, what is CGT?
In simple terms, it’s a tax applied to the profit you make when you sell or gift an asset that has increased in value since you acquired it. It’s how HMRC ensures everyone pays their fair share on profits from asset sales. When you dispose of such an asset, a CGT assessment must be carried out for that specific tax year.
This is usually calculated as the difference between the sale price and the original purchase cost. The HMRC website provides comprehensive instructions on how to calculate this. A CGT payment will be due to HMRC if a taxable gain is made.
CGT rates and reliefs
The exact rate of CGT depends on the type of asset sold or gifted. For instance, residential property disposals are taxed at either 18% or 28%, whereas non-residential properties (like shares) attract a rate of 10% or 20%. However, certain CGT reliefs available could reduce this liability, particularly when selling a business.
Private Residence Relief and your residential property
When selling your residential property, it’s crucial to consider the potential financial gain and how this might be offset by Private Residence Relief (PRR). PRR is a form of CGT relief that can exempt all or part of the financial gain from selling your ‘primary residence’. The property must have been your main home throughout your ownership period to qualify for full relief. However, the relief always covers the last nine months of ownership.
Working out your relief
If your property hasn’t been your main home for the entire time you’ve owned it, PRR is calculated based on actual and deemed occupation periods. Actual occupation refers to your time in the property as your primary home.
There’s no minimum time requirement for this, but a key test is whether an average observer would consider it your main residence. Deemed occupation applies when you’re physically absent from the property but still meet the necessary conditions for it to be considered your main home.
Criteria for Private Residence Relief
To qualify for PRR, certain key conditions must be met. One of the most crucial is that the qualifying ‘deemed periods’ must be sandwiched between periods of actual occupation.
Some examples of deemed periods that qualify for relief include:
- Those who work abroad can claim relief, regardless of how long they have spent overseas.
- If you are employed or self-employed and required to work elsewhere in the UK, you can claim up to a maximum of four years for the deemed occupation.
- Any period of absence from the property, regardless of the reason, can also be claimed for relief, up to a maximum of three years.
For further insight on these conditions, visiting the HMRC website is recommended.
Final months of ownership and Private Residence Relief
Another key period that qualifies for PRR is the last nine months of ownership. You can claim this period, provided the property has been your main home at some point during your ownership. However, this period is extended to 36 months for disabled individuals or long-term care home residents who are selling their main home.
Scope of Private Residence Relief
PRR conditions apply to properties with gardens and grounds within half a hectare. However, exceptions can be made if the area exceeding this is required for the ‘reasonable enjoyment’ of the property. Each claim will be assessed on an individual basis.
For spouses and registered civil partners living together, only one residence can qualify as the main residence at any given time. If they own more than one residence, they may need to confirm with HMRC which of their properties is their main home.
How your main residence is determined
Without a formal declaration, HMRC will determine your main residence based on several factors, including where your family lives, your place of work, your voter registration location and your correspondence address with HMRC, medical practitioners and banks.
Exceptions to Private Residence Relief
PRR does not apply to buy-to-let properties, business premises such as furnished holiday lets, land and inherited property that is not used as your main home. For individuals living abroad, separate rules apply, so seeking specialist advice is advisable.
Lettings Relief and Partial Private Residence Relief
In cases where you only receive partial PRR relief, you might be eligible for another type of Capital Gains Tax relief called ‘lettings relief’. This applies when you sell a home that was once your main residence and part of it was rented out while you lived there. However, lettings relief no longer applies if the entire house was rented out for a period.
CGT on additional properties
Getting to grips with CGT on a second property can initially seem complicated. The first step in this process is determining your chargeable gain. This involves subtracting any capital losses you’ve incurred during the current tax year. If you have capital losses from previous years, you can also use these to lower your gain, but only up to your CGT annual exempt amount.
How time affects your CGT annual exemption
As we navigate through the current tax year that began on 6 April 2023, every individual has a CGT annual exemption of £6,000. However, it’s important to note that this figure will drop to £3,000 from 6 April 2024. Once you’ve calculated your taxable gain or loss, you can then establish your CGT liability and get to grips with the necessary reporting requirements.
Understanding CGT rates and reporting obligations
CGT on residential property and carried interest typically fall into 18% and 28% tax rates. The portion of taxable gain within your basic rate tax bracket will be taxed at 18%. However, any gains that exceed this bracket will attract a CGT rate of 28%. This means that higher rate and additional rate taxpayers will face a 28% CGT on residential disposals.
Regulations for UK residents
If you’re a UK tax resident with a CGT liability from selling a UK residential property, you must submit a ’60 day’ CGT return. This requirement was introduced on 6 April 2020, initially requiring submission and payment of tax within 30 days from the completion date.
However, this timeframe was later extended to 60 days for disposals made on or after 27 October 2021. It’s crucial to remember that the CGT return is independent from the self-assessment tax return, meaning you may need to make two submissions for the year.
Guidelines for non-residents
Since 6 April 2015, CGT return requirements have been in place for non-residents selling UK residential property. Like UK residents, non-residents had a 30-day deadline to submit their returns from 6 April 2020, which was later extended to 60 days for disposals made on or after 27 October 2021. However, non-residents must submit a CGT return regardless of whether they have a liability to pay.
Working out gains on older properties
For non-UK residents who owned UK residential property before 6 April 2015, they should calculate their gain using the market value as of 5 April 2015, rather than the actual purchase cost. From 6 April 2019, non-UK residents are also subject to CGT on capital gains from direct or indirect disposals of all types of UK land and property, including interests in UK property-rich entities. Due to the complexity of these rules, it’s wise to seek professional advice.
Exceptions to keep in mind
In certain circumstances, you may not need to pay CGT on a second property. For instance, if you transfer an interest in a property to your spouse or registered civil partner (from whom you’re not separated), you won’t incur any CGT liability due to specific CGT rules applicable to spouses and registered civil partners.
Considering relief options and proactive planning
Certain relief options exist in the labyrinth of residential property sales that lighten your tax burden. One such pathway is the infrequently utilised dependent relative relief. While not commonly relevant, this specific type of relief can offer substantial advantages under appropriate conditions. However, it’s entwined with complexities and specific conditions, making it highly advisable to seek professional guidance before submitting a claim.
Engaging in pre-sale consultations with your accountant can be exceptionally beneficial. Forward planning and understanding your tax responsibilities can significantly alleviate potential CGT liability, ensuring you’re financially equipped for the property sale process.
Delving into Lettings Relief and Partial Private Residence Relief
Navigating the nuances of CGT relief requires understanding the details of Partial Private Residence Relief (PPR) and lettings relief. If you’re eligible for partial PPR relief, you may also qualify for an additional boon known as ‘lettings relief’. This relief comes into play when you sell a residence that was once your primary abode and a section of the property was let during your period of occupancy.
However, there’s a crucial caveat to lettings relief. This relief ceases to apply if the entire property was rented out for a certain duration. Being aware of these subtleties can aid you in maximising your relief benefits and efficiently managing your CGT responsibilities.
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