Capital gains tax explained Capital gains tax and property

Cottage

Normally there's no CGT on your main or only home

Capital gains tax is normally not payable on gains you make on your only or main home (this is called private residence relief). But all or part of any gain will usually be taxable if:

  • You develop your home – for example by converting part into flats
  • You sell part of your garden and your total plot is over half a hectare (1.2 acres)
  • You use part of your home exclusively for business
  • You let all or part of your home (but see below)
  • You live away (though gains relating to some absences are tax-free, including the last three years (falling to 18 months in April 2014).
  • You bought or improved the home wholly or partly for the purpose of making a profit.

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Tax relief if you own more than one home

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. 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.

Tax relief if you let out your home

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

However, provided the home genuinely has been your main home at some time, you can as usual claim tax relief for the last three years of ownership. 

You may also be able to reduce the capital gains tax by claiming letting relief – this deduction will be the lower of the gain related to the letting, the amount of private residence relief you are getting or £40,000. 

See HMRC helpsheet HS283 Private residence relief available from the HMRC website.

Letting example

For example, imagine you have owned a home for 20 years but let it out for the last eight years because you were working in another part of the UK and, when you sell, you make a profit of £100,000. 

Currently, the 12 years when you lived in the home qualify for private residence relief and also the last three years of ownership. Apportioning on the basis of years means that 15/20th of the gain is tax-free, in other words £75,000. 

The remaining 5/20th (£25,000) could be taxable, except that you can claim letting relief (for 5 years) . Letting relief is the lower of the taxable gain (£25,000), the private residence relief (£75,000) or £40,000. 

Therefore letting relief is £25,000 and completely extinguishes the gain, so there is no tax to pay.

The rules will change in April 2014, when the three year final period exemption will be reduced from 36 to 18 months.

Tax on gifted and inherited homes

Your parents may want you eventually to have their home. If they leave their home to you in their wills, 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 will be included in the estate, and inheritance tax may be payable instead. 

If you sell the property without having made it your own home, there could be CGT to pay, and this will be based on the increase in value between the date of death and the date when you sell.

Your parents might give you the home during their lifetime but carry on living there. For inheritance tax purposes, this counts as a gift with reservation  so the home will still count as part of your parents’ estates when they die. 

You may have to pay CGT when you eventually sell the home, and this will be based on the increase in value between the date they gave you the property and the date you sell. This is the case even though there may be inheritance tax to pay on the home at the time of your parents’ deaths.

Home example

For example, you inherit your father’s home when he died in August 2012. 

  • At the date of death, it was worth £200,000. 
  • You sell it six months later for £205,000 and can deduct selling costs of £3,000. 
  • You have made a gain of £205,000 - £200,000 - £3,000 = £2,000 which falls comfortably within your annual allowance, so no CGT is due. 

Imagine instead your father gave you the home 10 years earlier while he was still alive and continuing to live there. 

  • At the date of the gift, the home was worth £140,000. 
  • Again you sell six months after his death. In this case, you have made a gain of £205,000 - £140,000 - £3,000 = £62,000. 
  • After deducting your annual allowance of £10,900 (2013-14), you have a taxable gain of £51,100. If you are already a higher rate taxpayer, the tax bill on this would be 28% x £51,100 = £14,308. If you are a standard rate taxpayer, you would pay CGT at 18% on the amount of gain that takes you to the higher-rate threshold and 28% on the rest.  
  • In addition, the value at the date of your father’s death (£200,000) will be included in his estate for inheritance tax purposes, rather than the value at the date he gave it to you (£140,000).

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