One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions is the Private Residence Relief when you sell the family home. CGT is a tax on the profit made from selling certain assets such as property, shares or other investment e.g. antiques and fine art. There are a number of exemptions available which can reduce or remove a taxpayer’s liability to CGT.
In general, there is no CGT on a property which has been used as the main family residence. An investment property which has never been used as your primary home will not qualify. This relief from CGT is commonly known as Private Residence Relief (PRR). The PRR relief applies to qualifying residential properly used wholly as a main family residence. If you switch homes then you can notify HMRC which property is your primary residence through an election.
Examples of property sales that are not eligible for PRR include:
- a second home / holiday home;
- a property that you have not used as your main home;
- a property which you let out for people to live in;
- a property that you’ve inherited and have not used as your main home.
Everyone is allowed to make a certain amount of tax free capital gains each year. The ‘annual exempt amount’ for the 2020-21 tax year is £12,300. CGT is usually charged at a simple flat rate of 10% if your income is less than the higher rate income tax band or 20% if you are a higher or additional rate taxpayer and this applies to most chargeable gains made by individuals.
An 8% surcharge applies to the sale of chargeable residential property (apart from a principal private residence). Therefore, if you make a taxable gain on disposing residential property that is not your home are subject to CGT and a rate of 28% will normally apply. This rate is used when the total of your taxable income and gains are subject to higher rate tax. If you’re a basic rate taxpayer with an income of £50,000 or less, the rate is 18% but if your gain exceeds this amount the higher rate of CGT will apply to the excess. CGT is only payable if your total gains in the tax year are above your annual exempt amount.
If two or more individuals own a property, each would normally be subject to CGT on their share of the gain and would each be entitled to offset their annual exemption allowance with CGT only being payable on the excess.
A charge to CGT usually arises after you sell an asset but can also occur when you:
- give away a chargeable asset;
- transfer a chargeable asset to another person;
- exchange a chargeable asset for something else; or
- receive compensation for the loss or destruction of an asset, e.g. an insurance payout.
It is important to remember that the market value is used for tax purposes when transactions are between connected parties, like relatives or business partners.
We would be happy to advice you on possible ways to potentially mitigate your liability to CGT on the sale of a second home. We have listed some of the most common ways below.
Deduct allowable costs
Allowable capital costs can also be deducted from any chargeable gain on the sale of a second home or Buy to Let property.
This includes:
- Estate agents’ and solicitors’ fees
- Stamp duty paid when the property was purchased
- Surveying and valuation costs by surveyor, valuer or auctioneer
- Costs of advertising to find a buyer
- Costs linked to improvement work – e.g. an extension.
- Accountancy fees are allowable only to the extent that they relate to the ascertainment of market value of the assets or to any apportionment for the purposes of the computation.
CGT losses
You can usually offset capital losses brought forwards or incurred in the current year against gains made in the same tax year which will reduce the amount of gain subject to CGT. Where the amount of losses exceeds gains then the losses can usually be carried forward to offset against future gains.
Main residence election
It is increasingly common for taxpayers to own more than one home and there are several issues that homeowners should be aware of. An individual, married couple or civil partnership can only benefit from CGT on one property at a time. However, it is possible to choose which property benefits from a CGT exemption when it comes to be sold by making an election, subject to the facts fitting. There are special rules which determine the timing and frequency of changing an election which need to be considered.
Where a taxpayer lives in more than one property, they must inform HMRC as to which property is their main home. The homeowner must make a 'nomination' within two years of changing the property that they live in. A new nomination should be made whenever the number of homes a taxpayer lives in changes.
For example, a taxpayer lives in Manchester and purchases a second home in the Lake District in April 2021. The homeowner can nominate either property as his main home provided this is done within two years i.e. by April 2023.
Where the taxpayer does not make a nomination within 2 years, HMRC will decide which is the main home based on the facts. This can significantly affect the amount of CGT to be paid.
Taxpayers that are married or in a civil partnership and own two or more homes between them must make a joint nomination and are only entitled to Private Residence Relief on one home between them.
Transfer to spouse or civil partner
Transfers between spouses are currently exempt from CGT unless:
- you separated and did not live together at all in that tax year
- you gave them goods for their business to sell on
This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used as part of a disposal. This effectively doubles the CGT allowance for married couples and civil partners. The transfer must be a genuine, outright gift where consideration needs to be given if there is a mortgage on the property which might be seen as ‘consideration’ being given by the spouse now taking on half the mortgage. There are ways to mitigate tax in the event of a mortgage being on a property.
This means that if one spouse or civil partner has not made any gains in that tax year then you can effectively utilise the other person’s CGT allowance and possibly the basic tax rate band of 18% for basic rate taxpayers.
Payment of tax
The rules for reporting and paying CGT on the sale of a residential property changed with effect from 6 April 2020. This change means that any CGT due on the sale of a residential property needs to be reported and a payment on account of any CGT due made within 30 days of the completion of the transaction.
This new reporting requirement does not apply to property sales where the property sold is fully covered by Private Residence Relief as the sale will not be liable to CGT. There are penalties and interest if any CGT due is paid late.
Taxpayers that fail to meet the deadline, will be subject to a £100 fine, rising to £300 or 5% of any tax due (whichever is greater) the longer the payment is outstanding.
Note, the payment date for any CGT due on residential property sales made before 6 April 2020 remains to be paid on or before 31 January 2021.
