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28 January 2021
Capital gains tax (CGT) is a tax on the gain in value made when an individual disposes of a capital asset such as a residential property.
Individuals should subtract from their sale price the base cost (usually acquisition value) as well as other incidental costs (including acquisition and disposal costs and any costs of works enhancing the property) when calculating the chargeable gain. This figure is then set against the CGT rate for residential property, which is currently 28% for higher rate taxpayers. UK CGT on residential property affects both UK-resident and non-UK-resident individuals. Companies pay corporation tax at 19% on their chargeable gains.
Most people's homes are exempted from the charge due to principal private residence relief (PPR), which relieves any charge on an individual's only or main residence. Buy-to-lets and holiday homes are not eligible for this relief and consequently are still subject to the charge at 28%, although rumours abound that this rate could rise to 45% to match the rate that higher rate landlords pay on their rental income. However, although this rumour may prompt owners to bring forward a planned or contemplated sale, it is less likely to affect long-term owners of second homes who enjoy using that property. Companies cannot claim PPR.
However, individuals (including accidental landlords) must be wary of unexpected CGT bills on their main home. The most likely cause of this is the property not being the main residence for a period of time, meaning that PPR has to be pro-rated. This can happen throughout the course of the ownership of the property but is especially likely to happen at the end, such as when a person buys a new property but fails to sell their own. While PPR automatically provides that the last nine months of ownership are subject to the relief (before 6 April 2020 the period was 18 months), any period from moving out until selling the property which is longer than nine months will mean that CGT is payable (even if the property has not been let).
It has been suggested that PPR may be abolished but this is likely to create a lot of political ill will. Instead of abolition, increasing scrutiny is likely to be applied. PPR claims are likely to be increasingly challenged, especially where a property has been held for a relatively short period before disposal or is sold with gardens that have development value.(1)
For further information on this topic please contact Guy Abrahams, Elizabeth Small or Oliver Claridge at Forsters LLP by telephone (+44 20 7863 833) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Forsters LLP website can be accessed at www.forsters.co.uk.
(1) Further information on purchasing luxury property is available here.
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