Do I owe capital gains tax on my property?
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.
Our short video explains how CGT on property works.
When do I pay capital gains tax on property?
You may have a capital gains tax bill to pay if you:
- 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're 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.
What is 'private residence relief', or PRR?
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.
This means you won’t pay any tax on selling your home.
CGT rates for property in 2018-19
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 2018/19 tax year, you can make £11,700 profit before you pay capital gains tax. Married couples and civil partners can make £23,400.
If you're a basic rate taxpayer you'll pay 18% capital gains tax on property sales over this profit allowance.
Higher-rate and additional-rate taxpayers will pay 28%. You don't need to pay capital gains taxes when selling your main home.
What tax do I pay on a second property?
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.
How do letting relief and CGT work?
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, even if you weren't living in the property during those 18 months.
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
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.
How letting relief works in practice
Letting relief can feel confusing. This example illustrates how to work out capital gains tax when you sell a home you have been letting out.
|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 (PRR)||144 months (time it was your main residence) + 18 months = 162 months |
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) |
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 2018-19||£11,700|
|Taxable amount||£20,000 - £11,700 = £8,300|
|Married/civil partnership CGT allowance||£11,700 x2 (£23,400) therefore no tax is due|
|If you're selling by yourself and are a basic-rate taxpayer||18% of £8,300 = £1,494 CGT due|
|If you're selling by yourself and are a higher-rate taxpayer||28% of £8,300 = £2,324 CGT due|
CGT on gifted and inherited homes
Your parents or relatives may want you eventually to have their home. If anyone leaves their 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.
CGT 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.
|Value at date of death||£200,000|
|Sold on for||£205,000|
|Gain||£205,000 - £200,000 - £3,000 = £2,000|
|CGT allowance||£11,700 for 2018-18, therefore no CGT is due|
|Value at date of gift||£140,000|
|Sold on for||£205,000|
|Gain||£205,000 - £140,000 - £3,000 = £62,000|
|Taxable gain||£62,000 - £11,700 = £50,300|
|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 £50,300 = £14,084 CGT due|