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Property Matters: Capital Gains Tax Basics

Updated: Aug 1, 2020

What happens when you sell a residential property?

Capital Gains Tax (CGT) may be payable when you sell a property in the UK.

This usually applies to second properties such as a holiday home or a buy-to-let property but can be extended to your main home if you have not occupied it as such throughout your period of ownership.

Selling a second property

CGT is payable on the difference between the sale proceeds and the original cost of the property. Certain costs such as solicitor and estate agent fees, together with the stamp duty paid when you purchased the property, may also be claimed.

Where a property has been improved, such as the construction of an extension or installation of a new kitchen, then these capital costs may be available to reduce the value of the gain provided they meet certain qualifying conditions.

Should the disposal result in a loss, where your costs exceed the proceeds, this can be set against any other gains made in the year or carried forward and set against any future gains. Similarly, losses from any other disposals can be used to reduce the gain on the property sale.

Everyone is entitled to a CGT annual exemption which means the first part of the gain is tax free (£12,300 for 2020/21). As your annual exemption and losses can be used up by other gains, such as those made when selling stocks or shares held outside of an ISA, it is important to plan sales to make the best use of losses and your tax free amounts.

The resulting gain is taxed at the higher residential rates of 18% for any gain falling within the basic rate band and 28% for the remaining gain above this. Each owner bears their share of the gain and associated tax.

CGT is payable as part of your tax return declaration to HM Revenue & Customs, the tax on disposals in the year to 5 April 2020 being due by 31 January 2021.

House keys

Selling your main home

The main tax relief available for residential property is ‘Private Residence Relief’ (PRR).

PRR effectively removes any gain attributable to a qualifying period, which is a period you occupy the property as your main residence. Given most people will occupy their main residence as such for the entirety of their period of ownership, the entire gain is removed from the CGT charge.

As with any tax relief, there are caveats, including:

  • you can only have one main residence at any given time,

  • spouses or civil partners may only have one main residence between them,

  • larger properties over half a hectare (1.2 acres) may require closer review, and

  • either letting the property or the exclusive business use of any part or parts of the property will affect the amount of relief.

If a property has not always been your main residence throughout your period of ownership, then the time is apportioned between qualifying and non-qualifying periods, the latter being subject to CGT.

Certain periods may still be qualifying even though you did not occupy the property during that time, the main one being the last 18 months of ownership. People with a disability or those moving to a care home can claim for up to the last 36 months.

CGT changes from April 2020

The final qualifying period of 18 months will be reduced to 9 months.

Until recently it was also possible to claim a Lettings Relief of up to £40,000. To qualify you must only have let all or part of your main residence during your period of ownership. From April 2020 the relief is only available to live-in landlords who are in shared occupation with their tenants.

CGT on second properties or those that do not qualify for PRR in full will need to be reported and paid within 30-days of disposing of the property.

How can we help?

At Fairfields Tax we can prepare your CGT calculation if you have already sold your property or consider and advise on your options to mitigate your tax liability for a planned sale.

Please do contact us for a free, no obligation quote.

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