Capital Gains Tax

In general, there is no Capital Gains Tax (CGT) liability created when a property used as the main family residence is sold. An investment property which has never been used as a home will not qualify. This relief from CGT is commonly known as private residence relief.

Taxpayers are entitled to full relief from CGT when all of the following conditions are met:

1. The family home has been the taxpayers only or main residence throughout the period of ownership.
2. The taxpayer has not sublet part of the house – this does not include having a lodger share your house.
3. No part of the family home has been used exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use).
4. The garden or grounds including the buildings on them are not greater than 5,000 square metres (just over an acre) in total.
5. The property was not purchased just to make a gain.

If a property has been occupied at any time as an individual’s private residence, the last nine months of ownership are disregarded for CGT purposes – even if the individual was not living in the property when it was sold. The time period can be extended to thirty-six months under certain limited circumstances. There are also special rules for homeowners that work or live away from home.

Married couples and civil partners can only count one property as their main home at any one time.

A Post Transaction Valuation Check (PTVC) can be requested from HMRC for an individual to work out a capital gains tax liability or for companies to calculate corporation tax liability on chargeable gains. The request for a PTVC should be made using the CG34 form. HMRC’s guidance says the form must be completed and sent to the address on the form at least three months before the relevant tax return filing date.

The PTVC is a service offered by HMRC to check valuations after a disposal has been made, including a deemed disposal following a claim that an asset has become of negligible value but before the completion of a self-assessment return. This service is available to all taxpayers, individuals, trustees and companies.

If HMRC agrees with the valuations set out they will not question the use of those valuations in the return, unless there are any important facts affecting the valuations that have not been disclosed. Agreement to the valuations does not always mean that HMRC agree the gain or loss. When the return is filed, HMRC will consider the other figures used. If an agreement cannot be reached, HMRC will suggest alternatives such as using specialist valuers.

A higher rate of Capital Gains Tax (CGT) applies to gains on the disposal of residential property if the gain falls into the higher rate band. In the Spring Budget, the Chancellor announced a reduction in the higher rate that exists for residential property from the current rate of 28% to 24% from 6 April 2024. These rates apply to higher rate taxpayers as well as to trustees and personal representatives. The lower rate that applies to basic rate taxpayers will remain unchanged at 18%.

It is expected that the 4% reduction in the 28% rate will help increase revenue for the Treasury as the new rate is expected to increase the number of transactions. The Chancellor joked that perhaps for the first time in history both the Treasury and the OBR have discovered their inner Laffer Curve!

Most people are aware that they may not have to pay CGT when they sell their qualifying residential property used wholly as a main family residence. However other sales of property that are not a principle private residence, will be subject to CGT.

This includes:

• buy-to-let properties
• business premises
• land
• inherited property

There are various reliefs available from CGT for the sale of qualifying business assets.

The 18% and 28% rates of CGT that apply to gains in respect of carried interest remain unchanged from 6 April 2024. These rates previously mirrored those for CGT on disposals of residential property.

Business Asset Disposal Relief (BADR) applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available sellers can benefit from a 10% tax charge on exit from their business if BADR is available. When the relief is available Capital Gains Tax (CGT) of 10% is payable in place of the standard rate. 

There are a number of qualifying conditions that must be met in order to qualify for the relief. This includes that both of the following must apply for at least two years up to the date you sell your shares:

• you are an employee or office holder of the company (or one in the same group); and
• the company’s main activities are in trading (rather than non-trading activities) – or it is the holding company of a trading group.

There are also other rules depending on whether or not the shares are part of an Enterprise Management Incentive (EMI) scheme.

BADR used to be known as Entrepreneurs’ Relief before 6 April 2020. The name change did not affect the operation of the relief.

You can currently claim a total of £1 million in BADR over your lifetime. The £1m lifetime limit means you can qualify for the relief more than once. The lifetime limit may be higher if you sold assets before 11 March 2020.

In general, there is no Capital Gains Tax (CGT) on a property which has been used as the family's main residence. This relief from CGT is commonly known as Private Residence Relief or PRR. However, where part of the home has been let out the entitlement to relief may be affected. Homeowners that let out part of their house may not benefit from the full PRR but can benefit from letting relief. Since April 2020, letting relief has been restricted to homeowners who live in their property and partly rent it out.

The maximum amount of letting relief due is the lower of:

• £40,000;
• the amount of PRR due; and
• the same amount as the chargeable gain they made while letting out part of their home.

Worked example:

• You rent out a large bedroom to a tenant that comprises 10% of your home.
• You sell the property, making a gain of £75,000.
• You're entitled to PRR of £67,500 on the part used as your home (90% of the total £75,000 gain).
• The remaining gain on the part of your home that's been let is £7,500.

The maximum letting relief due is £7,500 as this is the lower of:

• £40,000
• £67,500 (the PRR due)
• £7,500 (the gain on the part of the property that's been let)

There's no Capital Gains Tax to pay – the gain of £75,000 is covered by the £67,500 PRR and the £7,500 letting relief.

You are not considered to be letting out your home if either:

• you have a lodger who shares living space with you; or
• your children or parents live with you and pay you rent or housekeeping.

HMRC’s guidance is clear that where a capital sum is derived from an asset, the relevant legislation treats the owner as having made a disposal for capital gains purposes.

The legislation contained in s22 TCGA92 states that there is:

“…..a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum…..”

There are occasions when a person may receive a capital sum even though a natural disposal of an asset has not occurred, for example, on receiving compensation for damage to an asset or a sum of money from another person for the right to use or exploit an asset.

HMRC’s internal manual states that as the word ‘disposal’ is not expressly defined in TCGA92 it must be given its normal everyday meaning. Therefore, disposals for capital gains purposes include natural disposals and part disposals of assets.

The term bed and breakfasting (sale and repurchase) of shares refers to transactions where shares are sold and bought back the next morning. This used to have Capital Gains Tax (CGT) benefits by crystallising a gain or a loss but is no longer tax effective over such a short period. The change to the rule happened in 1998 when new legislation introduced special share matching rules. Under these rules there are a number of limitations including a 30-day waiting period before the shares can be repurchased.

However, it is possible under certain circumstances to use a modified bed and breakfasting type of arrangement to sell an asset and buy it back again a short time later. A gain could be created in order to use up the annual exempt amount, or a non-resident may bed and breakfast their chargeable assets to establish a higher base cost before they enter the UK tax regime.

We would recommend you seek our advice before undertaking any such transactions to ensure that all tax aspects have been considered. For example, for any bed and breakfast transaction to be effective, there must be a genuine transfer of beneficial ownership of the asset and the share matching rules must be met.

Business Asset Disposal Relief (BADR) is available on the sale of a business, disposal of shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available sellers can benefit from a 10% tax charge on exit from their business.

When the relief if available Capital Gains Tax (CGT) of 10% is payable in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for the relief.

BADR used to be known as Entrepreneurs’ Relief before 6 April 2020. The name change did not affect the operation of the relief.

You can currently claim a total of £1 million in BADR over your lifetime. The £1m lifetime limit means you can qualify for the relief more than once. The lifetime limit may be higher if you sold assets before 11 March 2020.

Claims for BADR are made either through your self-assessment tax return or by filling in Section A of the Business Asset Disposal Relief helpsheet.

The deadline for claiming relief is as follows:

The annual exempt amount applicable to Capital Gains Tax (CGT) is to be halved from April 2024. This means that the exempt amount will be reduced from £6,000 currently, to £3,000 from April 2024. The exempt amount was as high as £12,300 2022-23.

Any taxpayers with small gains should consider the benefits of crystalising these gains before 6 April 2024 to fully use the £6,000 allowance for 2023-24. Married couples and civil partners both qualify for the £6,000 allowance, in which case organising joint ownership of these assets before disposal may be beneficial if each individual partner is not fully using their annual allowance. 

Transfers between spouses and civil partners are exempt from CGT. Making use of the full allowance can, in some circumstances, effectively double the CGT exemption before the end of the current tax year, to £12,000.

CGT for individuals is normally charged at 10% or 20%. If taxpayers pay basic rate tax and make a small capital gain, they may only be subject to a reduced rate of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. 

A higher rate of CGT applies to gains on the disposal of residential property (apart from a principal private residence). The rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

In general, there is no Capital Gains Tax (CGT) on a property which has been used as the main family residence. This relief from CGT is commonly known as Private Residence Relief or PRR. However, where part of the home has been let out the entitlement to relief may be affected. Homeowners that let out part of their house may not benefit from the full PRR but can benefit from letting relief. Since April 2020, letting relief has been restricted to homeowners who live in their property and partly rent it out.

The maximum amount of letting relief due is the lower of:

• £40,000
• the amount of PRR due
• the same amount as the chargeable gain they made while letting out part of their home

Worked example:

• You rent out a large bedroom to a tenant that comprises 10% of your home.
• You sell the property, making a gain of £75,000.
• You're entitled to PRR of £67,500 on the part used as your home (90% of the total £75,000 gain).
• The remaining gain on the part of your home that's been let is £7,500.

The maximum letting relief due is £7,500 as this is the lower of:

• £40,000
• £67,500 (the PRR due)
• £7,500 (the gain on the part of the property that's been let)

There's no Capital Gains Tax to pay – the gain of £75,000 is covered by the £67,500 PRR and the £7,500 letting relief.

You are not considered to be letting out your home if either:

• you have a lodger who shares living space with you, or
• your children or parents live with you and pay you rent or housekeeping.