Following on from my blog “Capital Gains Tax: A Guide to Chargeable Gains”, I now go into more detail on the finer points of selling property and the capital gains tax that may apply to residential property.
If you are selling a residential property, you need to be aware that there could be a chargeable gain. This will depend on your ownership history of the property so below are the most common situations we encounter:
- Rental property which you have never lived in – In this situation there is likely to be a capital gain to declare.
- Your own home but you moved out for a period of time – There could be a capital gain to declare subject to possible reliefs and I go into more detail on the reliefs available below.
- You have lived in your home throughout but rented out at least one room in the house for a period of time – There could be a capital gain although this is also subject to possible reliefs which I will explore in more detail in this blog.
I would always recommend you take the advice of a capital gains tax specialist if you are unsure if a gain is chargeable to capital gains tax.
How to calculate a capital gain
To calculate the capital gain, you simply need to take the proceeds from the sale and then deduct the costs incurred on acquisition and disposal. In essence, you are working out the cash profit on the transaction.
You may deduct incidental costs of disposal from the proceeds of the sale. On the sale of residential property, these would include costs such as:
- Estate agents costs
- Legal fees
- Capital Gains Tax Specialist fees
Similarly, the costs of acquiring the asset will be allowable and deductible. Examples of the types of costs would be:
- Legal fees
- Cost of acquiring the property
- Stamp duty
- Surveyor fees
The other cost that can be included in the calculation of the chargeable gain is the deduction of enhancement expenditure. Common examples of this would be:
- Costs of extending the property
- Improvements to the property such as adding a new shower room
- The addition of a conservatory
One caveat to the above is that the enhancement expenditure needs to be reflected in the state of the property on the date of sale. I included an example of this in my previous blog on capital gains tax and chargeable gains.
Once the above costs have been calculated and offset against the sale proceeds, we come to the gain. We can then look at any possible reliefs available.
Reliefs available on the sale of a residential property
Principal Private Residence Relief (PPR)
One of the main reliefs available on the sale of a residential property is Principal Private Residence Relief (PPR). Please note that this relief is only available if the property sold has, at some point, been your only or main residence.
The relief is deducted from the gain calculated in the section above to come to the chargeable gain on which tax is payable (subject to additional reliefs being available).
To calculate the amount of relief available, we would multiply the capital gain by the following fraction:
GAIN X (PERIOD OF OCCUPATION/PERIOD OF OWNERSHIP)
Period of ownership
The period of ownership for PPR purposes begins from the date that the purchase of the property is legally completed and the purchaser has the right to occupy the property.
Period of occupation
In this context, “occupation” means both actual and deemed occupation. Actual occupation is when the property is your only or main residence. I outline below the main types of deemed occupation.
The last 9 months of ownership of the property are always treated as deemed occupation.
There are then the following situations where absence from the property can be treated as deemed occupation. One very important point to note in relation to the below is that a period of absence from the property can only be treated as a period of deemed occupation if it was both preceded and followed by a period of actual, physical occupation.
The tax legislation states that the following periods of absence can be treated as deemed occupation:
- Where you are abroad for reasons of employment, this period is unlimited.
- Where you are working elsewhere in the country either as an employee or self-employed trader, the maximum period of deemed occupation is 4 years.
- Any period of absence up to a maximum of 3 years.
The above can apply cumulatively. This means that a longer period of absence may qualify as deemed occupation as certain periods can be added together.
There are additional factors that need to be considered when checking if PPR relief is available. I would always suggest taking the advice of a capital gains tax specialist before filing anything with HMRC.
Lettings relief is available in addition to PPR. Once PPR has been calculated, we can then look to claim lettings relief.
HMRC changed the qualifying conditions for claiming Lettings Relief, so to qualify for this, you must have lived in the property with your tenants at some point.
If you do qualify then the amount claimable is the lowest of the following;
- The amount claimed as PPR relief
- The same amount as the chargeable gain you made while renting out the property and occupied it with the tenant
The above is only a brief summary of the tax legislation around the reliefs available and other factors may need to be considered. If you have any questions, please do not hesitate to get in touch.
Calculating and reporting capital gains tax payable
Calculating capital gains tax payable
Once the gain chargeable to tax has been calculated, you can deduct the annual exemption (if not used already) from the gain. The exemption for the 2020/21 tax year is £12,300.
Then, for residential property, the tax rate applied will be 18% for basic rate taxpayers and 28% thereafter.
From the 6th April 2020, you now need to report and pay the capital gains tax due within 30 days of completion of the sale of the residential property. Please note that this is 30 days from completion, not the exchange of contracts.
If the gain is not reported within 30 days, you may have penalties and interest to pay.
You can visit the HMRC website, which provides more details on this.
I hope you found the above guide to capital gains tax on selling residential property helpful. If you would like to chat through any questions you have, please get in touch by either telephone or email using the details below.
Daniel Routcliffe ACA
Tel: 01392 360008