After covering the basics of Capital Gains Tax (CGT) in a previous blog, I thought it would be useful to discuss the rules around selling property, such as land or buildings. Like most assets, a taxable gain on property is calculated by taking the proceeds for selling the property, subtracting the amount you originally paid for it and any costs of selling, (which includes costs to improve on a building such as an extension).
The gain from the sale of a residential property is taxed at a different rate to other capital gains items. Instead of 10% for basic rate taxpayers and 20% for higher rate taxpayers, you will pay 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Personal Property Relief
If you are selling a building which is also your home the building would be exempt from CGT. The limit on the exemption is that you still have to pay CGT on the gain for the time you owned the property but were not living in it. For example if you bought the property in January 2005 and lived in it until January 2006, then sold it in January 2007, you would have to pay tax on half of the gain since you only lived in the building for half of the time you owned it. To qualify for the exemption you must have only used in the property in question as your main residence and have used it as your home and nothing else.
CGT relief for periods where you didn’t live in your home
There are additional rules, for example if you have at least lived in the property for a period of time then you automatically get to count the last eighteen months for the exemption. This exemption is to help people moving house, you can live in the new house for up to eighteen months while you try and sell the old house and not lose any tax relief for that period.
In addition, the exemption still applies for a new property providing you move in within twelve months of purchasing it. In exceptional circumstances, this can be extended to twenty-four months if you are unable to move in before twelve months are up.
You can also claim the relief if you had to move temporarily for work, providing it was either to another country, or a distance where you were unable to still live at home and for a period of less than four years. The property would also have to be your main residence both before and after the period you worked away in. You also cannot have another property that you can claim the exemption on for the above to apply. The above can also apply to living away from home, with the duration changed to up to three years instead of four.
Using part of your home for business or renting
If you use a part of your home exclusively for business, such as having a dedicated room for your office, there will be no exemption on that portion of your home.
The same applies for when you are renting out a portion of your home, except you can also claim to let relief on the remaining gain, this will be the lowest figure out of £40,000, the personal property relief you are entitled to, or the actual gain itself. For example, if you rent out 20% of your property and have a gain of £50,000 then £40,000 would be covered by the personal property relief and you would have £10,000 gain remaining. The lowest figure is the £10,000 gain which becomes the amount of letting relief available. This means you would have no chargeable gain left after taking the relief.
Owning more than one home
If you live in more than one home, not just own them, you can nominate one of them as your main home. This needs to be done within 2 years of acquiring your additional home. If you don’t nominate one of the homes then HM Revenue and Customs (HMRC) will decide which is your main home based on the facts available, which could affect your CGT when you sell either of them. A civil partnership or married couple that live in two separate homes have to make a joint nomination for which they both decide is the main home, you’re only entitled to the exemption on one home between you. Details on how to contact HMRC can be found here.
If you have any questions on the above, or feel you would like assistance on capital gains tax in general, please do not hesitate to contact us.
