2.2. Capital gains tax (CGT)
2.2.1. Higher CGT rates for residential property
Higher rates of CGT are paid on residential property than on other assets. Basic rate taxpayers pay 18% on gains they make when selling property, while higher and additional rate taxpayers pay 28%. With other assets, the basic rate of CGT is 10%, and the higher rate is 20%. Bear in mind that any capital gains will be included when working out your tax status for the year, and may push you into a higher bracket.
You generally won’t need to pay the tax on any gain you make when selling your main family home. However, you could face a CGT bill if you sell a second home for a profit. You may also need to pay CGT if your home is partly used as a business premises or you sell off part of your home. Therefore, the higher CGT rates for residential property make CGT planning for the family home even more critical.
2.2.1.1. Earlier CGT filing and payment dates for residential property from April 2020
For property disposals completed on or after 27 October 2021, a UK resident individual or trust disposing of UK residential property have been required to file a “UK land return” within 60 days of the completion date unless there is no capital gains tax to pay. There will not usually be any capital gains tax to pay where you are disposing of a property which has been your main residence throughout the entire period of ownership or the gain (together with any other capital gains in the tax year) is less than the annual exemption (£6,000 for 2023/24).
Where properties are held jointly or in partnership, each owner is required to submit a UK land return (and pay the tax) in respect of their share of the disposal. Penalties will apply if the return is filed late and start at £100 increasing to the higher of £300 and 5% of the tax due after six months. If more than twelve months late, a further penalty of the higher of £300 or 5% of the tax due will be charged.
The seller will also be required to pay an estimate of the CGT 60 days from the completion date. This will be treated as a “payment on account” against their total income tax and CGT liability for that year when the self-assessment tax return is submitted.
The individual or trust is, therefore, required to estimate how much tax is payable. This will depend on several factors which could result in a refund/additional liability being due when the self-assessment return is submitted. If additional tax is due when the annual return is filed, then interest will be payable at the standard rates set by HMRC.
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You will need to create a CGT on UK property online account to report and pay any CGT due. To do this, you’ll need a Government Gateway user ID and password. You will then need to follow the instructions at https://www.tax.service.gov.uk/capital-gains-taxuk-property/start/report-pay-capital-gains-tax-uk-property#howTo
2.2.1.2. Will a UK land return always be required?
No. Some common examples of where a UK land return will not be required are:
• where the gain is covered by private residence relief (PRR)
• the disposal is a “no gain, no loss” transfer between spouses or civil partners
• if a loss arises on the sale of the property
• the gain is sheltered by capital losses crystallised before the sale takes place
• the gain is small enough to be covered by the individual’s CGT annual exemption for the year of disposal (£6,000 for 2023/24).
2.2.2. Private residence relief
Private residence relief (PRR) normally stops you paying tax on any gain you make on the family home. In this section, we’ll look at the tax planning opportunities when you own more than one family home that you don’t let out and highlight situations when you might inadvertently lose some of the PRR. But first of all, let’s explain the basics of the relief.
Note. From 6 April 2015 owners who are not resident for tax purposes in the UK are subject to non-resident CGT (NRCGT) on gains on the disposal of UK residential property. Individual non-resident owners can claim main residence relief, but only if they are present in the property for at least 90 midnights during the tax year.
2.2.2.1. How much can you claim?
Full relief
If the property was your only or main home throughout your period of ownership (excluding the last nine months), then you can automatically claim full PRR relief so you have no CGT liability. This is regardless of the capital gain you make on the property.
Example
Angela buys her first home in June 1992 for £48,000. She lives in it from the date of purchase up until the day she sells it in June 2023 for £297,000. Angela has made a capital gain of £249,000 but she has no CGT to pay. She can claim full PRR because the property was her main residence throughout her period of ownership.
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Partial relief
If the property was your main home for only part of your period of ownership, then the amount of relief you can claim is calculated by dividing the period(s) when the property was your PRR (including the last nine months of ownership and certain other periods of absence) by the total length of time you owned the property.
Example
Richard buys a home in April 2003 for £50,000. He lives there until June 2012 before moving to a bigger home nearby. Richard eventually sells his original house in May 2023 for £250,000. The house was Richard’s main residence for 146 months and he owned the property for a total of 241 months. Therefore, the house is treated as being Richard’s main residence for 155 months (the 146 months he lived there plus the last nine months) and the amount of relief he can claim is 155/241ths of £200,000 so, before any other reliefs, his taxable gain is £71,369.
Note. When calculating this relief, ignore any periods of ownership before 31 March 1982.
2.2.2.2. The “nine-month rule”
As long as the property was your main residence at some point, since 6 April 2020 the last nine months of ownership will also always qualify for the relief. From 2014/15 to 2019/20, it was the last 18 months that qualified.
Note. If you lived in the property at any time during the last nine months of ownership, you can’t make a claim for the additional nine months as well. TIP
Sell the property within nine months of it being your main residence to avoid any potential CGT bill.
The nine-month rule also means you can effectively claim double PRR - on the last nine months of your old property and on your new property at the same time.
The nine-month period is increased to 36 months where at the time of the disposal of the home, the owner (or their spouse or civil partner) is a disabled person or a long-term resident in a care home, i.e. actually or expected to be there for more than three months, and the owner (or both the owner and their spouse where the spouse’s disability attracts the relief) doesn’t have another main residence to which the PRR exemption could apply at the time. This 36 month-exemption did not change when the general exemption was reduced to nine months from 6 April 2020.
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2.2.2.3. What other periods of absence from the property still qualify for PRR?
In addition to periods when the property was actually your main residence, you can also include certain periods when you were absent from the property in order to work out the length of time it was your main residence.
Note. For these periods to qualify as periods of occupation, the property must actually be your main residence both before and after these absences. Also, while you’re away, you can’t have elected for a different main residence.
The periods of absence that count towards PRR are:
• three years for any reason whatsoever (it can be a single period of three years or shorter periods as long as they don’t add up to more than three years in total) - if the period is more than three years, this seems to mean that the house can be treated as the main residence for the first three
• a period of up to four years (this can also be a single period or in aggregate) when you (or your spouse) are required to work elsewhere in the UK as part of your job1
• a period of any length when you (or your spouse) are required to work abroad and all your duties were performed overseas.1
• You will keep the exemption for these absences even if you are unable to return to the property afterwards because you are required to work elsewhere on your return.
Therefore, you can have long periods of absence from the property without losing any part of your PRR. It is irrelevant whether the house was unoccupied or let during the period of absence. Provided the necessary conditions are met it is treated as your main residence even if you had let it and could not therefore use it during that period.
Example
Nick bought a home in Bournemouth in February 1994 and lived in it as his only residence. In October 1994, his employer required him to work in Reading. He lived there in a flat provided by his employer until October 1999.
Then his employer transferred him to work in Melbourne and also provided a flat there. He ended his employment in March 2001 and toured Europe until November 2001. Then he returned to his home in Bournemouth and stayed there until he sold it in February 2005. The whole of the period of ownership qualifies for PRR.
February 1994 - October 1994 Main residence
October 1994 - October 1998
October 1998 - October 1999
October 1999 - March 2001
March 2001 - November 2001
Four years’ absence as required to work elsewhere in UK
One year of absence for any reason
Period of absence due to employment abroad
Seven months’ absence for whatever reason
November 2001 - February 2005 Main residence
You can apply the rules in any way that is most beneficial to you. For example, if the period from October 1994 - October 1999 had been treated as part of the “three years for any reason” that would have used up the three-year allowance and so no relief would have been available for the period between March and November 2001.
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2.2.2.4. What happens if you’ve bought a property but can’t move in until it’s been renovated?
You may not be able to move into your new home straightaway because it’s still being built, needs refurbishing or you’re having trouble selling your old property. However, you can still treat the new property as your main residence from the date you bought it as long as you move in within 24 months (this won’t affect the main residence status of your old property for the first nine months because of the “nine-month rule”).
More than 24 months? In the case of G and M McHugh v HMRC 2018 where the occupation of a home had taken 37 months from purchase, the First-tier Tribunal said that the first 24-month period could still qualify as occupation and only the excess should be excluded for PRR purposes. HMRC was not happy with this decision so the Finance Bill 2020 contained clauses to change the law with effect from 6 April 2020 so that if you fail to move into the property within the 24-month period, none of the initial ownership period will qualify for PRR.
Buying off-plan? When exactly are you treated as acquiring the property? This was tested in the case of Higgins v HMRC 2019. In 2006 Higgins paid a reservation deposit to secure a two-bedroom apartment to be constructed on the site of the former St Pancras station hotel in London. He exchanged contracts and paid a further deposit in October 2006 (before development had begun), with a second deposit being paid in March 2007, and completed the purchase on 5 January 2010, at which point he became entitled to occupy the property, which had been substantially completed in December 2009.
He occupied the property as his main residence from completion of the purchase until completion of its sale in January 2012 (exchange in December 2011).
HMRC denied full PRR on the grounds that Higgins had not occupied the flat for the entire period of ownership, which in its view began on exchange in October 2006 and ended in December 2011.
The Court of Appeal ruled that the “period of ownership” for PRR begins when the property purchase is completed, not from exchange, which overturned a previous Tribunal finding in HMRC’s favour.
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2.2.3. “Flipping” homes
2.2.3.1. Is flipping still allowed?
One of the few tax disadvantages to being married is that a married couple/civil partners can only have one main residence for PRR at any one time. Unmarried couples can have one each. So if spouses each own a home or they jointly own more than one home, PRR can only apply to one of the homes at a time.
However, if you have more than one home, it’s possible to nominate which one you would like to be treated as your main residence for PRR purposes. By doing this, it’s possible to minimise the CGT charge on both properties by switching (“flipping”) the election between them. There was much talk that this practice would be banned when it hit the headlines a number of years ago due to a few MPs taking advantage of this perfectly legitimate tax planning strategy. In 2014 HMRC even consulted on scrapping flipping altogether. In the end, the previous “three-year rule” was cut to the “18-month rule” instead. From 2020/21 onwards, this was halved again to the “nine-month rule” which means flipping a property may not be as rewarding as it used to be but it can still be used to save some CGT.
Example
Colin and Rosie own a home in Bournemouth that they bought in 1996 for £300,000. In January 2014, they also bought a house in Somerset for £350,000 which they use mainly at the weekend and during the school holidays. In January 2024 they sell the Somerset property for £500,000.
Without an election. HMRC will treat their Bournemouth home as their main residence for PRR. There will be a gain of £75,000 gain each on their second home in Somerset before the annual CGT exemption (2023/24 £6,000). As higher rate taxpayers, each of them will have a CGT bill of £19,320 (28% x (£75,000 - £6,000) = £38,640 in total.
With an election. When they bought the Somerset property in 2014, they made an election to nominate the Bournemouth property as their main residence. In late 2023 they made another election to switch the main residence to the Somerset house. Under the nine-month rule, the Somerset property is now exempt from CGT for the last nine months. The gain is therefore reduced to 9.25/10ths £150,000 = £138,750. This will knock £3,150 off the couple’s joint CGT bill.
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2.2.3.2. How do you make an election?
The election must be made in writing to HMRC and sent to your local tax office. In the case of a married couple, both spouses must sign the election for it to be effective.
For a Nominating a Main Residence Election, visit https://books.indicator-flm.co.uk. You’ll find the access code at the front of this book.
Time limit
From the date of acquiring the second residence, you have two years to tell HMRC which one is your PRR. Note it’s not the point you purchase a property, but the date which it becomes a residence that is critical. If you acquire a third residence this can re-open the opportunity to make an election in respect of any of the three residences. This also works where one of the properties is sold - the key is that there’s a change in the number of residences that could be eligible.
TIP
You can extend the two-year limit by renting a flat for a few months as a third residence. Then you can elect one of the three properties within two years of starting to rent the flat.
2.2.3.3. How do you change the election?
Once you’ve nominated your main residence, you can flip it by making a similar election in writing to HMRC. The new election can be backdated by up to two years.
TIP
When making an election, it’s usually advantageous to choose the property that is most likely to make a bigger capital gain or be sold first. If you do end up selling the other one first, then you can simply change the election before you sell it.
Once the sale has been completed, your other home will automatically be your main residence. Your other home will have lost a small amount of PRR but only for the period that it takes to actually sell the second property and is likely to be pretty insignificant in a long period of ownership.
TIP
If house prices are likely to fall in the future, it may not be beneficial to make a PRR election for a second home if a loss could be made when you sell it. Making a PRR election will reduce any capital loss available to be offset against other capital gains.
For a Variation of Main Residence Election template, visit https://books.indicator-flm.co.uk. You’ll find the access code on at the front of this book.
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2.2.3.4. What happens if you don’t make an election?
If you own two or more properties and haven’t told HMRC which one is your main residence within the two-year time limit, it will make the decision for you based on, for example, the time spent in each property, where your children go to school, which is the main postal address, etc.
It’s possible HMRC may question whether the second property ever became a main residence so you will need to keep evidence of occupation. It’s worth keeping a diary showing the dates of overnight stays.
TIP
Make the election to nominate your main residence as soon as you acquire the second home. That way, you can make another election at any time in the future to switch your main residence.
TIP
You get the opportunity to make a new election every time you have a new combination of two or more homes. For example, if you acquire a third home, you will need to make a new election. This can work to your advantage if, for example, you own three homes and didn’t make an election within the two-year limit. If you let out one of the properties, it is no longer available for you to use as a home, and you therefore have a new combination of two or more homes - in this case a reduction from three to two. This triggers a new twoyear election window.
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2.2.4. Selling land that’s part of your home
A property developer may be interested in buying part of your home’s garden in order to build new houses. If you decide to sell the land, do you have to pay CGT?
Half a hectare or less
If the total area of the grounds (including the area on which the house itself stands) is less than half a hectare (just over an acre) then HMRC should readily accept the land as being part of your main residence. Therefore, you’ll be able to claim full PRR on any gain so you’ll have no CGT to pay.
More than half a hectare
If you have more than half a hectare of grounds, you should argue an increase in the area that’s classed as garden so that a larger area can be CGT-exempt. A number of taxpayers have tried to extend the half a hectare limit to reflect the size and character of their homes. The argument is that a larger area is required for the reasonable enjoyment of a larger house. Some have been successful, some not. In one case, just because the owner had special requirements for using the extra grounds, e.g. to keep horses or vintage cars, didn’t mean it was necessary for the reasonable enjoyment of the property, as other occupiers may not have this requirement. The best evidence for this is if your neighbours have similar houses and similar sized gardens.
Where the grounds exceed half a hectare, it’s better if the land is bought and sold with the house. If it is bought or sold separately, this would indicate that a previous or subsequent owner did not “require” this land for the “reasonable enjoyment” of the residence.
2.2.4.1. Would it be better to sell the property before you sell the land?
No. Case law has decided that if you sell your main residence before you sell the land, then you are unable to claim PRR on the sale of the land. This is because the land is no longer attached to your main residence. So if you were thinking of moving or now don’t fancy living next to a building site, be very careful what you sell first.
TIP
So you don’t lose any PRR:
• assuming you’re within the half a hectare limit, sell the land wanted for building before you sell the house and remaining garden
• do not let development work take place before the land is sold
• do not fence off the development plot until it is sold.
Note. Where the land is over half a hectare, the exemption may be restricted whether it is sold before, at the same time as or after the house is sold.
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TIP
2.2.4.2. Develop and move
Let’s say that rather than just sell part of your garden, you want to maximise profits by developing it first, i.e. building a new house in the grounds, and then selling it off. However, this will mean that the developed land is no longer part of your main residence and therefore much of your profit could be swallowed up by a hefty tax bill.
A solution to this would be to move into the newly built property and sell your old house. Your old property will qualify for full PRR as long as it’s sold within nine months. You will also be entitled to full PRR on your new house as long as you move in within 24 months of the development starting.
2.2.5. Lettings relief
Prior to 6 April 2020, if, during the period of ownership, you let out your main residence (all or part of it) as residential (not commercial) accommodation, then on top of PRR, you could claim lettings relief. It made no difference whether you let the property out before or after it became your main residence.
From 6 April 2020, lettings relief is only available if you are in shared occupancy with a tenant. The new rules apply not only to future lettings but also any let periods before 6 April 2020. This means that if you are renting out a former home after you have moved out, you will lose entitlement to those letting periods.
2.2.5.1. What is shared occupation?
Shared occupation is considered to apply where the owner is residing in the same dwelling with the tenant and continues to occupy that dwelling as their only or main home throughout the period of the letting. For example, if you and your spouse live in the house but let out two spare rooms amounting to 25% of the property to tenants who had exclusive use of their rooms (and their rooms only). As the tenants have exclusive use of their rooms, PRR would be restricted to 75% of the gain but as you occupied the property with your tenants, you could claim lettings relief.
Sometimes the grounds in which a person’s residence stands contains a separate dwelling. Where this separate dwelling is let out to a third party it will not qualify for lettings relief or PRR.
2.2.5.2. What’s it worth?
If you are in shared occupancy, the amount of lettings relief that you can claim is the lower of:
• the amount of PRR relief
• the gain attributable to the letting period; and
• £40,000
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If the amount of the gain covered by PRR is less than £40,000, then the lettings relief can never be more than the PRR.
Example
David acquired his house 30 years ago and recently sold it making a capital gain of £350,000. He occupied the house as his main residence for the full 30 years and let out rooms amounting to 30% of the property to a tenant who had exclusive use of those rooms during the entire time.
Capital gain £350,000
Less:
Exempt due to PRR (70% x £350,000) (£245,000)
Less:
Lettings relief which is the lesser of:
£40,000
PRR relief of £245,000
Gain from letting period £105,000 (£350,000 x 30%) (£40,000) Capital gain 65,000
2.2.5.3. Can spouses each claim the relief?
Yes, providing they both meet the qualifying criteria. Where the property is jointly owned and jointly let, each is entitled to the £40,000 maximum relief. This makes the relief potentially very valuable as up to £80,000 can be sheltered using lettings relief.
2.2.5.4. Should you put your two properties into joint names when marrying?
Where a married couple (or those in a civil partnership) who have had separate homes move in together, care should be taken with the sale of either property. Often the advice given prior to a sale of any property is to transfer half of it to your spouse before the sale is made. Due to the inter-spouse transfer rules, such a transfer attracts no tax charge and then two annual exemptions and possibly lower rates of tax can be used. Prior to 6 April 2020, this could have been a very costly mistake as it could have resulted in part of the property not qualifying for PRR if the transferee had never occupied the property as their main residence. However, the Finance Act 2020 provides that where a person transfers an interest in a property to their spouse (whether or not that property is their main residence), the receiving spouse inherits the transferring spouse’s ownership history including their previous use of the property.
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2.2.6. Is PRR affected if adult children still live at home?
If your adult children, or any other lodger for that matter, are living with you, you should be able to claim PRR when you sell your home. This is supported by HMRC’s own guidance (SP14/80) which says that where the owner of a dwelling house lets a room to a lodger and that lodger lives as a member of the owner’s family, sharing the accommodation and meals with the family, no part of the dwelling house will be treated as having ceased to be occupied as the owner’s residence. Therefore, there shouldn’t be any PRR restriction in this case.
However, HMRC’s guidance goes on to say that where you let a flat or set of rooms without structural alteration (or with only minor adaptions), the PRR will be restricted in respect of the part that is let out as it has ceased to be occupied by you. However, you should still be able to claim lettings relief on the part of the gain that doesn’t qualify for PRR. This is the case even if the tenants have separate washing and cooking facilities.
2.2.7. Separation and divorce
A common feature of the breakdown of a marriage or civil partnership is the disposal, by one party, of their interest in the family home usually to their former spouse. While the transfer of any asset between spouses is CGT free when they live together, prior to 6 April 2023 this benefit was lost in the tax year following the year of permanent separation, i.e. the “no gain no loss” window is the end of the tax year that the couple permanently separates.
From 6 April 2023, transfers of chargeable assets between spouses will be treated as occurring at no gain no loss for up to three years from the end of the tax year of separation. Where assets are being transferred under a court approved divorce or dissolution agreement, the “no gain no loss” treatment will apply for any longer reasonable amount of time that may be required.
In addition, prior to 6 April 2023 the PRR exemption was only preserved for a departing spouse’s share of any capital gain on the sale of the marital home if the sale occurred within nine months of them ceasing to live there. New rules introduced from 6 April 2023 mean that where a spouse retains an interest in the former marital home following their departure, they will be given the option to claim PRR for their period of non-occupation on the sale of the property provided they haven’t nominated another property as their main residence for the same period.
TIP
Any claim made for PRR on a former marital home would be at the expense of the exemption for the same period on a replacement home that has been acquired and should, therefore, be carefully considered to ensure the optimum tax position is achieved across the properties overall.
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2.2.8. CGT and use of home as office
We’ve highlighted that where you use a room exclusively for business it will not count as part of a home for tax purposes. This means you might lose out on some PRR where you sell your home for more than you paid for it. However, in many cases, even if part of the house may not be eligible for PRR, the problem is not of great practical significance.
Example
Adam buys a house for £150,000 and sells it seven years later for £190,000. He used one-eighth of the house exclusively for business. One-eighth of the capital gain of £40,000 is £5,000 which is covered by his CGT annual exemption. Even if the gain were £48,000, it would still be covered by the annual exemption assuming he doesn’t have any other chargeable gains.
TIP
If you use a room at home as your office and you calculate that the gain on that part will be significant, it’s easy enough to avoid any PRR restriction by having some other use of it. For instance, perhaps a sofa bed for guests, or even storing personal items or papers. The non-business use should apply more or less to the whole room rather than just part of it or HMRC might argue that the restriction on PRR can apply to part of a room.
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