You may have to pay capital gains tax if you make a profit on the disposal of a property. However, property disposal tax reliefs may be available, especially if the property is, or has been, your only or main residence.
Property disposal tax: main residence relief
Some or all of the gain on the disposal of a property which is, or has been, your only or main residence may be completely free from tax.
The profit on disposal of your home will be completely exempt from capital gains tax provided that all of the following conditions are met:
- you only have one home and you have lived in it as your main home since you acquired it;
- you have not let out the property (although having a lodger does not affect this);
- you have not used any part of the property exclusively for business purposes;
- the total area of the grounds and buildings does not exceed 0.5 hectares (5,000 square metres); and
- you did not acquire the property with the sole intention of making a profit on disposal.
You may have to pay capital gains tax if any of the conditions set out above are not met.
Property disposal tax: private residence relief if you have lived away from the property
If you have lived away from the property for a period of time, that period may not qualify for the private residence relief. However, the last 18 months of ownership will always qualify for relief, provided that the property was your own or main home at some point.
Relief will also be given for the first 12 months of ownership even if you did not live there if it was being built or renovated or you couldn’t sell your previous home and you lived in it as your only or main residence by the end of the 12-month period.
Periods living away from the property may also qualify for relief. Periods of absence totalling up to three years qualify for relief irrespective of the reason for the absence for any reason for periods adding up to 3 years. A period of absence of up to 4 years will qualify for relief if you had to live abroad for work reasons, provided that you lived in the property before and after the absence, unless your work abroad prevented you from doing so.
If you only own one home you get relief for the last 36 months before you sold your property if it was sold before 6 April 2014, or if you are disabled or in long-term residential care.
The fraction of the gain that qualifies for relief is found by dividing the total periods qualifying for relief by the total period of ownership.
Property disposal tax: lettings relief
If you dispose of a property which qualifies in part for main residence relief and it has also been let during the period of your ownership, you may be able to claim lettings relief.
The lettings relief available is the lowest of:
- the amount of the main residence relief due
- the amount of the gain that relates to the period of letting and
Property disposal tax: more than one home
If you have more than one home, only one of them can be your main residence for any period for the purposes of this relief. If you own more than one home and you have not nominated one as your main residence, the one that is your main home will usually be the one where you have spent the most time.
If you are married or in a civil partnership and have more than one home between you, you and your spouse or partner can only have one home qualifying for main residence relief.
If you have more than one home, and you are UK resident for tax purposes, you may nominate one of your homes as your main residence, even if in fact it is not your main home. You must do this within two years of acquiring a second home. You can do this by notifying HMRC in writing of the home which you wish to have treated as your main residence for capital gains tax purposes.
The nomination needs to be signed by all of the owners of the property. If you have nominated one of your homes as your main residence, no relief will be available in respect of any other property, apart from the periods that always qualify for relief (e.g. the last 18 months of ownership).
Since 6 April 2015, it has only been possible to nominate an overseas property as your main home if you live in it for at least 90 days in each tax year.
Property disposal tax: non-residents and UK residential property
Until 5 April 2015, non-UK residents were not subject to capital gains tax. That meant that no capital gains tax was payable by non-UK residents owning UK property. Capital gains tax has been payable when UK residents dispose of UK residential property. However, if the property was owned before 6 April 2015, the gain arising is calculated on the assumption that you acquired the property on 6 April 2015 at its then market value.
Non-UK residents must notify HMRC of the disposal of UK residential property within 30 days of the completion of the sale or within 30 days of any other transaction, e.g. a gift. If you are registered for self-assessment, you can elect to pay the tax with your self-assessed tax on the usual due date. If not, you will also need to pay the capital gains tax within the 30 day period.
Property disposal tax: relief for a dependent relative’s residence
You may get main residence relief in respect of a property that has been occupied by the owner’s dependent relative who was in occupation of the property on 6 April 1988. A dependent relative is defined for this purpose as any relative of the owner or the owner’s spouse who is incapacitated from maintaining him or herself by old age or infirmity, or the owner’s mother or mother-in-law, whether or not incapacitated, who is either widowed, separated or divorced from her husband.
Property disposal tax: other reliefs
If the disposal of a property does not attract main residence relief or associated reliefs, reliefs may still be due in specific circumstances.
Spouses and civil partners
Gifts between spouses and civil partners are not subject to capital gains tax. The transferee spouse or civil partner is treated as acquiring the asset at the original cost of the transferor.
Gifts to charity
There is no capital gains tax when assets are given to charity.
Disposals which are chargeable lifetime transfers for inheritance tax purposes
It may be possible to “hold over” the gain arising on the transfer of an asset which is a chargeable lifetime transfer for inheritance tax purposes. The effect of the relief is that no capital gains tax is charged on the gift. However, the transferee is treated as acquiring the asset at the transferors original cost for capital gains tax purposes.
Gifts of business assets
It may also be possible to claim “hold over” relief as above if the subject matter of the gift is a business asset.
Relief may be available if a business is transferred to a limited company in exchange for shares. In certain circumstances, a portfolio of let properties may qualify as a business for this purpose.
If the person disposing of the asset is not UK resident, he or she is only subject to capital gains tax on UK residential property and on assets used for the purposes of a trade carried on in the UK through a branch or agency.
Property disposal tax: how to work out the gain
The gain is usually calculated as the difference between the selling price and the acquisition costs plus the costs of capital improvement and incidental costs of disposal such as estate agents’ and solicitors’ fees. However, if the property is given away or sold at less than market value, then the disposal proceeds are deemed to be the market value of the property at the time of the transaction. If the property has been inherited, its cost will be the value on death as ascertained for inheritance tax purposes, or if no such value was ascertained, the market value of the property. For these purposes, market value is defined as the price which the property might reasonably be expected to fetch on a sale in the open market.
Care needs to be taken with valuations as estate agent valuations commonly overstate the market value of the property. “Red Book” valuations in accordance with the Royal Institution of Chartered Surveyors guidelines are recommended.
Enterprise Tax Consultants can advise on property disposal tax
If you are unsure as to your position in relation to property disposal tax, we can assist. The services we offer include:
- Advice in relation to your UK income and capital gains exposure
- Advice on inheritance tax planning
- Advice on asset protection strategies
- Advice for non-UK residents
- Advice and assistance in relation to the disposal of UK residential properties
Contact us for a no-obligation initial conversation with an experienced tax adviser.