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Capital Gains Tax on Property

Published on September 10, 2014 by Danko Puskaric in News, Property Investment

As you may well imagine, the question of Capital Gains Tax on Property is highly complicated, particularly if you own property for buy-to-let, have a second home within the UK or indeed have a second home in a foreign country.

I personally know of several people who, for tax resident purposes, are deemed to live in a foreign country such as Spain, but when it comes to domiciliary issues, they are deemed to be based in the UK. This has a great bearing on their future tax liabilities and I will deal with this aspect later.

Once again, I have to stress that I am neither a legal nor accountancy expert but the information contained within this article is the culmination of hours of in-depth research. Let us look at some of the main points.

Selling your own home

Under normal circumstances and indeed in most cases, the individual will not be liable for any capital gains tax on the sale of a private home since most people will qualify for what is known as Private Residence Relief. In order to qualify, there are two criteria that you must pass: –

  • The property must be your main residence at the time of sale
  • It has been used solely for private dwelling purposes in its entirety, which effectively means that no part of it has ever been used or indeed is used for a commercial venture. This especially is applicable should you work from home and have a Home Office.

It is interesting to note that you are perfectly entitled to sell part of your garden but not necessarily the property itself at the same time, and providing the above two conditions have been met, you would not be subject to any capital gains tax on the selling price.

I mention this point because if you have a large garden, but specifically below 5000 sq. ft. in view of the demand for building land, this could present an opportunity to sell the garden only.

Please bear in mind that you may not qualify for a full Private Residence Relief if you fall foul of any of these essential points.

  • As I mentioned above, full relief may not apply if the property, including the site on which the house is built, exceeds 5000 square metres.
  • You have at any time used any part of the property, including any outhouse, solely for the use of business purposes.
  • If you have let out the entire property or indeed only part of that property, it may be possible to claim Letting Relief instead for that part of the property. Once more, the Letting Relief may also apply when you have taken in one or more lodgers. I do not intend to deal with any aspect of this within the confines of this article.
  • This final item might seem obvious but there are those who forget that if you purchased the property with the clear intention of selling it in order to make a quick profit, then you may be sure that Private Residence Relief will not apply.

Just for the record, you do not have to physically claim this relief since you are given it automatically. If you complete an annual Self-Assessment form you may however have to include this item within that form. It is your obligation though to inform HMRC should any of the exclusions mentioned above apply to your case. It is not for HMRC to chase after you to determine your situation.

I’d just like to mention here two other small points that relate primarily to a couple living together. If you give your home to your spouse or civil partner, you will normally not have to pay any capital gains tax. However you must ensure that you have both been living together for at least part of the tax year in which you dispose of the property. Always remember though that should they dispose of the property at a later date, they may themselves be responsible for any capital gains.

Property Held Overseas

As I mentioned earlier in this article, there is a substantive differences between being resident in a foreign country and being domiciled there. Your property overseas may be a second home or indeed your primary residence and in this instance, you do need to take professional advice as to where you stand in respect of capital gains tax with regards to this property. The applicable conditions are extremely detailed and I must say are far too involved to be incorporated within this article.

Calculation of Capital Gains Tax

One of the first things you need to determine is the length of time that you have owned the property. Up until April 2014, the last three years prior to the actual date you dispose of the property, automatically qualified for full relief. However from 6th April – the tax year 2014 to 2015, the period has been reduced to 18 months. As a result the date of ownership starts either from the actual date you purchased the house or from a period not less than 18 months or more before the disposal date.

The importance of the purchase date is because any period that the property is owned as the primary residence prior to the 18 month deadline, is automatically permitted full tax relief. This means that should you decide to rent the property during the last 18 months, or indeed even sublet part of it, that period is also automatically exempt from any Capital Gains Tax.

In today’s world, couples who are not married may have lived together for a period of time. Each individual in such a relationship is entitled to their own Private Residence Relief, which is a bonus when each individual owns their own personal residential property. The same however does not apply to married couples. The couple must individually and jointly designate a particular property as their primary residence in order to qualify for private residence relief that and any second or more properties would therefore fall subject to capital gains tax.

As I have mentioned throughout this article, Capital Gains Tax on Property is extremely complicated and I cannot stress enough the necessity to contact suitably qualified professionals. However in order to give you a guideline of your possible liabilities, there are a number of Capital Gains Tax calculators on the Internet but I would recommend going to the horse’s mouth so-to-speak and have a careful look at that supplied by HMRC.

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About the author
Danko PuskaricDanko is IT professional with big passion about properties from young age. He is based in Manchester where he actively investing in properties and helping others to sell their houses.

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