If you are selling a residential property in the UK, be it a house, chalet, bungalow or another type of home, you might be wondering about the capital gains tax (CGT) position and whether it applies to your sale. If so, read on as we set out the circumstances in which you may be liable for CGT, particularly on the sale of a second or rental property.
Capital Gains Tax on House Sales
If you dispose of a property that is not your main residence, typically a buy-to-let property or second home, you may have to pay CGT on any profit.
For tax purposes, disposing of a residential property means:
- Selling it.
- Transferring it to someone else.
- Swapping it for something else.
- Receiving compensation for it, such as an insurance payout due to loss or destruction.
Capital Gains Tax Relief
Under the Private Residence Relief scheme operated by Her Majesty’s Revenue and Customs (HMRC), a vendor or seller is entitled to full CGT relief if:
- The property is a dwelling house, which HMRC defines as a house, flat, fixed caravan/manufactured home or a houseboat).
- It has been the homeowner’s only (or main) residence during ownership. Notably, HMRC grants exceptions for absences to occupy job-related accommodation, as well as for taking in a single lodger. However, the owner(s) must have lived in the property at some point and not have bought it solely to profit.
- The garden or grounds area around the building including sheds and outhouses, etc. does not exceed 5,000 square metres, equivalent to slightly more than an acre.
- The owner did not use any part of the home exclusively for business.
If the private sale does not meet all the above criteria under the terms of the tax relief scheme, the transaction will probably be subject to CGT. The overriding principle is that relief is not available if the purchase was merely to make a gain.
Additionally, if a dependent relative previously occupied the property as the main home, private residence relief might apply. From 2020, relief will apply to the time you lived there and the final nine months of ownership. The latter period of relief extends to thirty-six months for people who either have a disability or move into a care residence.
Checking CGT Liability on Property
Usefully, the HMRC HS283 help sheet details the capital gains tax relief allowances, who qualifies for them and how the system works.
Owners of multiple homes can choose which one of them to nominate. Notably, married couples and civil partners are allowed to claim private residence relief for only one property at any one time.
Significantly, people who transfer a home to their wife, husband or civil partner are not usually liable to pay CGT. However, accounting advice may be advisable regarding the broader situation, including lifetime gifts and possible inheritance tax.
Calculating CGT Liability
To calculate the gain on disposing of a second home in the UK, start with the sale price of the property. If transferred as a gift or sold for less than it was worth, take the market value instead. Next, deduct allowable costs: legal fees, estate agent commission and any improvement work such as an extension. However, decorating and routine maintenance do not count.
Usefully, the gov.uk site enables vendors to determine whether there is a liability for CGT and to work out the net gain after deducting allowable expenses. During the tax year ending 5th April 2020, the tax applies to total gains of £12,000 or more, whereas lower amounts are exempt.
Above the exemption, CGT applies in two bands at between 18 per cent and 28 per cent. Conveniently accessible via the gov.uk site, the HMRC tax calculator will give an indication of the amount due. During the calculation, the page will request the date and value of the sale, along with total costs and fees such as professional valuations and advertising. This facility is for private owner-occupiers; note that lettings, rental agents and limited companies fall under different tax arrangements.
The amount payable is due by 31st January in the year that follows the end of the fiscal year in which the chargeable event occurred or crystallised.
In summary, CGT relates to sales and other disposals of second homes, buy-to-let houses, inherited properties, business premises and land. It applies when the owners are private individuals, self-employed traders or members of business partnerships. Conversely, directors of limited companies that own such properties (as sometimes occurs in trusts and expatriate portfolios) could be liable for corporation tax instead.
Finally, expert accounting advice is advisable if an individual has made multiple chargeable gains during a tax year.