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Capital gains tax on property

By Ian Robinson

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Capital gains tax on property

Capital gains tax is normally not payable on gains you make on the sale of your only or main home. But if you own more than one, there may be a bill to pay.

The rules on capital gains tax (CGT) and your home can be quite complex. Essentially, if you’re selling your main home that you live in you are very unlikely to need to pay CGT at all, because of a tax relief called 'private residence relief'.

However, if you’re selling a second home, or selling a home that you currently let out, you might have to pay CGT, although there are ways you might be able to reduce your bill through letting relief or nominating which of your homes you want to be tax-free.

This guide is explains exactly how capital gains tax on property works, how much you'll pay - and how you might be able to reduce your capital gains tax bill.

When you pay capital gains tax on property

You may have a capital gains tax bill to pay if:

  • develop your home – for example, by converting part of it into flats
  • sell part of your garden and your total plot, including the area you are selling, is more than half a hectare (1.2 acres)
  • use part of your home exclusively for business
  • let out all or part of your home - this doesn’t include having a single lodger (to count as a lodger and not a tenant you need to be living in the property too)
  • moved out of your property 18 months or more ago - to move into a partner’s home for example
  • bought a home for the purpose of renovating it and selling it on.

Capital gains tax and 'private residence relief'

If none of the above points apply and you’re selling your home, you’re automatically be eligible to a tax relief called private residence relief, which means you won’t pay any tax on selling your home.

Capital gains tax rates for property 2017-18

When you sell a property, a proportion of the profits you make can be earned tax-free. This is your capital gains tax allowance. 

In the 2017/18 tax year, you can make £11,300 profit before you pay capital gains tax. 

If you're a basic rate taxpayer you'll pay 18% capital gains tax on property sales. Higher-rate and additional-rate taxpayers will pay 28%. You don't need to pay capital gains taxes when selling your main home. 

2017-18 capital gains tax rates remain at 18% and 28% for property sales even though they have fallen to 10% and 20% for other capital gains.  

Find out more: Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

Second property tax

If you use more than one home, you can nominate which will be tax-free. It doesn’t have to be the one where you live most of the time.

Generally, it makes sense to nominate the one expected to make the largest gain when you come to sell it. You have two years from when you get a new home to make the nomination.

Married couples and civil partners can have only one main home between them, but unmarried couples can each nominate a different home.

Remember, you don’t get tax relief if you bought your home just to sell it on and make a gain.

Letting relief and capital gains tax

If you have let out either part or all of your home, a proportion of any gain when you sell it will relate to the letting and could be taxable.

However, provided the home genuinely has been your main home at some point, you can claim tax relief in the form of private residence relief for the time it was your main residence, plus the past 18 months of ownership.

You may also be able to claim letting relief, which will reduce your capital gains tax bill.

The amount of letting relief you can claim will be either:

  • The gain you receive from the letting proportion of the home
  • The amount of private residence relief you get
  • £40,000

Whichever is the lowest of these three will be the one you can claim.

It's important to note that you can't claim private residence relief and letting relief for the same period. This means if you are letting the property out when you come to sell, the past 18 months qualify for private residence relief rather than letting relief.  

The exact amount of private residence relief and letting relief you can get depends on the amount you sell the home for.

Don’t forget that having a single lodger, which is someone that lives in the home with you, doesn’t count as letting out your home, so you will be exempt from capital gains tax.

Private residence relief (PRR) and letting relief - how they work in practice

Letting relief can feel confusing. If you’re feeling bewildered, this example illustrates how to work out capital gains tax when you sell a home you have been letting out.

We have referred to private residence relief

  Amount of time
Your main residence 12 years (144 months)
Your second home 4 years (48 months)
You let it out 4 years (48 months)
Total time you own the property 20 years (240 months)
 
  Amount of money
Your profit when you sell £100,000
Private residence relief 144 months (time it was your main residence) + 18 months = 162 months
162/240 =0.675
67.5% of £100,000=£67,500 of profit covered by PRR
Letting relief 30 months (48 months you let it out - 18 months covered by PRR)
30/240=0.125
12.5% of £100,000=£12,500 of profit covered by letting relief
Amount of profit - PRR and letting relief £100,000 - £67,500 - £12,500 = £20,000
CGT allowance 2017-18 £11,300
Taxable amount £20,000 - £11,300 = £8,700
 
Married/civil partnership CGT allowance £11,300 x2 (£22,600) therefore no tax is due
If you're selling by yourself and are a basic-rate taxpayer 18% of £8,700 = £1,566 CGT due
If you're selling by yourself and are a higher-rate taxpayer 28% of £8,700 = £2,436 CGT due

 

Capital gains tax on gifted and inherited homes

Your parents or relatives may want you eventually to have their home. If anyone leaves their r home to you in their will, you inherit the property at its market value at the time of death.

There is no capital gains tax payable on death, but the value of the home will be included in the estate (defined as all assets and property minus debts and funeral expenses) and inheritance tax may be payable instead.

If you sell the property without having made it your own home - essentially living in it as your main residence, thus making you eligible for private residence relief-  there could be CGT to pay. This will be based on the increase in value between the date of death and the date when you sell, minus any associated selling costs

If you’re given the home during the owner’s lifetime - while they are still living there - this is called a gift with reservation. Essentially this means it still counts for inheritance tax purposes when the gift giver passes away

You may have to pay CGT when you eventually sell the home, and the amount will be based on the increase in value between the date they gave you the property (not the date of their death)and the date you sell. This is the case even though there may also be inheritance tax to pay on the home at the time of death.

Capital gains tax on gifted and inherited homes - an example

These tables explain what would happen if you inherited your father's home. The first table explains what would happen if it was gifted on death. The second table explains what would happen if you were given the home 10 years before your father's death, and he continued to live there until he died. 

 

Example 1 Amount
Value at date of death £200,000
Sold on for £205,000
Selling costs £3,000
Gain £205,000 - £200,000 - £3,000 = £2,000
CGT allowance £11,300 for 2017-18, therefore no CGT is due
 
Example 2 Amount
Value at date of gift £140,000
Sold on for £205,000
Selling costs £3,000
Gain £205,000 - £140,000 - £3,000 = £62,000
CGT allowance £11,300
Taxable gain £62,000 - £11,300 = £51,000
Tax bill if you're a basic-rate taxpayer 18% on gain that takes you to higher-rate threshold, 28% on amount above this
Tax bill if you're a higher-rate taxpayer 28% on gain = 0.28 x £51,000 = £14,280 CGT due
  • Last updated: June 2017
  • Updated by: Tom Wilson
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