Capital gains tax explained Capital gains tax and property
Capital gains tax is normally not payable on gains you make on your only or main home, because these qualify for private residence relief (PRR). 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 18 months)
- 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 claim tax relief for the time it was your main residence, plus the last 18 months of ownership.
You may also be able to reduce the capital gains tax due 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. It's important to note that you can't claim private residence relief and letting relief for the same period, so if you are letting the property out when you come to sell, the last 18 months qualify for PRR rather than letting relief.
See HMRC helpsheet HS283 Private residence relief available from the HMRC website.
If you own a property for 20 years (240 months), live in it as your main residence for the first 12 years (144 months), use it as a second home for the next four (48 months), then rent it out for the final 4 (48 months), you can claim both private residence relief (PRR) and letting relief on the gain you make when you come to sell.
Assume the profit you make on the sale is £100,000. The amount of PRR you can claim is 144 months plus 18 months for the final period of ownership. This is a total of 162 months, out of the 240 months total- 0.675%, which means that £67,500 of the £100,000 gain (£100,000 x 67.5%) is tax-free.
The remaining £32,500 gain is potentially taxable, but you can set letting relief for 30 months against it (48 months letting period, less 18 months PRR). The gain attributable to the letting period is 30/240 = 12.5% x £100,000 = £12,500.
The amount of letting relief you receive is the lower of the attributable gain (£12,500); the PRR claimed (£67,500); and £40,000. This means that the taxable gain of £32,500 is reduced by £12,500 to £20,000. If this is further reduced by your £11,000 CGT allowance, tax is only payable on the remaining £9,000 (at 18% or 28%, depending on your total income for the year).
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.
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).