What is Capital Gains Tax (CGT)?

What is Capital Gains Tax (CGT)?

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 tax payers. 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/contemplated sale, we expect that it is less likely to impact long-term owners of second homes who enjoy using that property. Companies cannot claim PPR.

Individuals (including accidental landlords) must be wary of unexpected CGT bills on their main home, however. The most likely cause of this is the property not being the main residence for a period of time, meaning 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. Whilst 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 this 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 and so we expect that claims to PPR will be increasingly challenged, especially where a property has been either held for a relatively short period of time before disposal or is sold with gardens that have development value.

Elizabeth Small is a Partner and Oliver Claridge is an Associate in the Tax team.

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