Dealing with capital gains tax in the United Kingdom, especially with the property market, is challenging. The rules are not straightforward, and, in some cases, selling a home doesn’t impact the capital gains tax you owe, but in other cases, it does.
There are also many other regulations and issues, such as the 36-month rule relating to capital gains tax. As you’ll see, the 36-month law is no longer applicable across 36 months, but the name lives on.
If this sounds confusing, wait until you start trying to complete a tax return or undertake a capital gains tax submission. No matter your tax issue, it is best to call on a tax specialist or accountant to undertake the tax planning work in dealing with tax issues or a CGT bill.
What is the 36-month rule?
The 36-month rule relates to the exemption timeline before the sale concludes when selling a property. It used to be a 36-month notice period, hence the name, but this is no longer the case. The rule has been amended, and for most property sales, the exemption period is much less than 36 months, and in many cases, nine months.
Full Relief is available for:
- The period of ownership in years
- The last nine months of ownership period, even if you didn’t reside there
For full private residence relief, the 36-month final period exemption is only applicable for people who own a single home and are recognised as having a disability, are in long-term residential care or where the property sale completion date was before 6th April 2014.
For full relief, the 18-month rule only applies for a property sold between 6th April 2014 and 6th April 2020.
Selling a home that isn’t your main residence
If you sell a property that isn’t your principal UK residential property, it doesn’t impact your CGT. However, if you sell a second dwelling house or more than one property, you will typically have to pay capital gains tax on the gains made from the property sale.
Capital gains tax is typically 18% or 28% of the actual gain, not the house’s sale price, depending on your tax bracket.
HMRC has a lot of guidance on the matter for property owners; of course, your tax specialist will take care of matters for you. They’ll review your options, and if you are eligible for private residence relief (PRR) or even partial private residence relief, they will instruct you on how much tax you owe and how to take advantage of this.
What is PRR?
Private residence relief applies to the sale of property that is or has been the principal residence for the seller, even if the term “dwelling house” hasn’t been officially defined. Generally, a dwelling house is where a person lives, but it can include adjoining buildings, grounds and gardens. Hence there is often debate over the definition.
If any element of the grounds or building is used for business purposes only, the gain relating to this sale area isn’t eligible for relief. In light of current working practices, a room at home used for occasional remote working isn’t considered exclusive for business purposes.
Capital Gains Tax exemptions
If you can satisfy the following criteria, there is no capital gains tax due when selling a property:
- This is your only home or main residence, and you are selling it
- The property has been your main house for all the time it has been yours
- You’ve used no part of your home exclusively for business activities
- The whole property size of the building(s) and grounds is less than 5,000 square metres
- The seller didn’t buy the house with the sole aim of a taxable gain arising
If some of these criteria apply, partial CGT might be applicable on the residential property, regardless of the period of ownership.
If you aren’t eligible for full private residence relief , it might be possible to enjoy partial relief. You, or your accountant, can determine this by completing the CGT tax return summary pages for a tax year. After submitting it, HMRC will inform you if you are eligible for partial private residence relief. Of course, a qualified accountant or tax specialist will have a good idea if you are eligible for this relief before submitting a tax return.
Does Private Residence Relief apply when selling your second home?
At any single point, private residence relief only counts for one residence. Therefore, if you have a second home, it will not matter in the criteria for private residence relief or for tax owed.
What happens if the seller makes a loss when selling the property?
Capital gains tax relates to profit on the sale, not the actual sales price, a loss on a property means there is no CGT liability to deal with.
Does the income tax bracket matter when you pay capital gains tax?
When it comes to income tax, and how you pay tax, every aspect matters. If you are a higher rate taxpayer, your CGT payments for a property sale are likely to be higher, even if a basic rate taxpayer sold the same property or one similar.
Do you know your tax band?
Even if these sales take place in the same tax year, and everything else is equal, the different tax rates impact the amount owed when higher and basic rate taxpayers pay CGT.
This is why it is best to speak with a tax planning specialist who’ll offer tailored advice and guidance to your situation. If tax relief is available, your specialist will inform you, hopefully reducing your tax year liabilities.
What about landlords with a buy to let property?
It is one thing dealing with CGT for residential properties, but good landlords have other issues to consider when they pay CGT after disposing of a rental property or flipping houses in general. It is possible to claim letting relief if you’ve lived in the rental property at the same period as tenants paid rental income.
Landlords can enjoy the lowest figure of:
- The amount you claim private residence relief
- The chargeable gain main for the entire period letting the property
Speak with an expert for all capital gains tax purposes
If you need guidance on when and how to pay capital gains tax when selling an only or main residence, private residence relief matters and letting relief, be sure to speak with a tax and UK residential property specialist.