When you make a gain after disposing of an asset, you'll be aware of the need to pay Capital Gains Tax (CGT). But do you know the full rules around CGT for residential property?
If you're an individual selling your own property - rather than a business selling a property owned by the company - the rules for taxing this capital gain are different from those for other types of gain. The reporting and payment deadlines are shorter too.
And, to add to the complexity, it's not just a normal residential property sale that can trigger the need to report on this gain.
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Scenarios where there's a need to report the gain include
- Transferring the property into a limited company
- Moving the property into a trust
- Gifting the property to someone other than your legal spouse
- Disposing of the property in any other way, apart from an exempt transfer between spouses.
Don't worry, there is one scenario where you won't get hit by CGT
The disposal of your property will be free of CGT if it's been your main residence throughout its period of ownership, and you've never rented the property out in whole, or in part. In that scenario, you can ignore capital gains tax.
In all other cases, you may have capital gains tax reporting and payment issues to consider. And this means there's real value in understanding a little more detail around the CGT process.
How does CGT work for disposals of residential property?
Generally, most capital gains are reported as part of the annual self-assessment tax return filing. Any tax that's due is then payable by the end of January following the tax year in which the gain is realised. But for gains on residential property, this needs to be reported within 60 days of completion (not exchange of contract unlike most CGT rules), and any capital gains tax due needs to be paid at the same time.
- To report your gain, you need to create a 'Capital Gains Tax on UK Property' online account, if you don't already have one. You'll need to have a Government Gateway account to do this.
- Disposals are only reportable through this system if there's CGT to pay. So, you don't need to report the disposal if gains are within the annual allowance, are offset by previous losses or where Principal Private Residence (PPR) relief applies in full. You may still need to report them on your annual self-assessment return, though.
- The tax rate on residential property disposals is 18% for basic-rate taxpayers and 28% for any part of the taxable gain that falls above the basic threshold - currently £50,270.
- To calculate which rate(s) to use, you should add the taxable gain to your other total taxable income for the year of disposal. This will usually mean making an estimate as the other sources of income will not normally be finalised when working out how much CGT is due.
- The starting point to calculate the tax due is to work out the total gain, then how much of that total gain is taxable.
- The total gain is Net Proceeds less Gross Costs. Net Proceeds is what the property sold for, less any associated costs such as estate agents fees, legal fees etc. Gross Cost is the original purchase price plus associated costs such as legal fees, stamp duty and any capital improvements made such as adding on a conservatory or extension.
- NOTE: if the property was acquired before April 1982, the Gross Cost is the market value at 31st March 1982.
- The most common deduction is PPR relief, which excludes any gain arising from the period during which the property was your only or main residence. In addition to periods where the property was actually your main residence, certain other periods are counted as if the property was your main residence.
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These tax reliefs will only apply if the property was your main residence for at least some of the period of ownership. These 'deemed periods' are
- The last 9 months before the property was sold.
- The period between purchasing it and actually moving in if it was less than 2 years, and before moving in you were living in your old home while selling it, or you were building, altering or redecorating the newly acquired property. To qualify for this deemed period, nobody else must have used the property as a residence during the period.
- Provided that the property was, in fact, your only or main residence both before and after, the first 36 months of absence(s) for any reason whatsoever. Periods of absence beyond the first 36 months will not count for PPR.
- Provided that the property was, in fact, your only or main residence before, and that after it was either your only or main residence, or you were prevented from living in the property because your terms of employment required you to live elsewhere, the following periods are deemed to be periods for which PPR applies:
- 4a. Any period of employment abroad where all the duties of employment were performed abroad.
- 4b. The first 48 months (can be over multiple periods) where either self-employment or the duties of UK employment required you to live elsewhere. Periods of absence beyond the first 48 months will not count for PPR.
NOTE: 4a and 4b apply to you if the absence was because the situation described applies to a spouse or civil partner with whom you were living.
- Periods of absence before 31 March 1982 are ignored.
- The proportion of the total period of ownership for which PPR did not apply is used to calculate the proportion of the total gain which is subject to CGT.
- If part of the property is used exclusively for non-residential purposes, that proportion of the total gain is fully subject to CGT. So, if, for example, you use a room exclusively as an office for your business, the gain related to that proportion of the property is taxable. That's why we recommend shared domestic and business use of any particular area.
- If part of the property is rented out while you occupy another part, lettings relief may be available to offset some of the capital gain related to the part of the property rented out and the period for which it is rented out. This relief is capped at the lower of:
- The taxable gain arising from the letting
- The PPR arising for that period
- Lettings relief is not available if the owner isn't jointly occupying the property for the relevant period.
Talk to us about the tax treatment of your property sale
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As you can see, it's no walk in the park working out whether CGT is due. Assessing your situation and calculating how much CGT you'll be liable to pay is a complex matter. We can help you calculate any taxable gains and reliefs available. And we'll make sure that you comply with the tight reporting deadlines applicable to residential property disposals.
If you're planning on disposing of any residential property, talk to us at the start of the process - we'll make you aware of any CGT issues and can help you come up with a resolution.
Get in touch to talk through your residential property disposal.