Capital gains tax on the sale of your home
Normally when you sell your home (or ‘private residence’) you do not have to pay capital gains tax (CGT) on the profit, provided you have lived there throughout the entire period of ownership, because the gain is relieved (exempt) from tax. This relief is subject to certain conditions being satisfied. Here we examine the rules and the special treatment afforded to armed services personnel (and others required to work away from their ‘home’).
What counts as my home for these purposes?
In the simplest case, if you own a single property and live there throughout your period of ownership, then that is your home for these purposes. These rules apply equally to houseboats and residential caravans. A garden area of up to half a hectare is included as part of your home, or a larger area if that suits the property.
It is important to realise that you and your spouse or civil partner may only have one private residence between you whilst you are 'living together'. Unless you are separated, you are deemed to be living together even when your spouse or civil partner is posted away from ‘home’.
If you own more than one property and live in both of them, for example you use one as a holiday home, then you need to choose which is to be your private residence for these purposes within two years of acquiring the second property, even if one of them is not in the UK. You need to formally advise HMRC of your decision in writing. Further information is available on GOV.UK.
My spouse is posted overseas. Does this mean we can each have a private residence?
Generally speaking, no. As stated above, you may only have one private residence between you whilst you are ‘living together’. You will be treated as still living together unless your marriage has broken down and you consider yourselves to be separated. Similar comments apply to civil partners.
You can read more about the breakdown of a marriage or civil partnership as it affects capital gains tax in the main section of our website dealing with capital gains tax. Remember that there will also be other tax issues arising at that time.
What happens if I sell my house but I have not always lived in it?
There are special rules governing this situation. You can read more on GOV.UK.
Broadly, the following periods are always fully relieved from tax as long as you lived in the property as your home at some point:
- Any period when you lived there and it was your only private residence;
- The last 18* months of ownership (that may be extended to 36 months if you are disabled or you move to a long-term care home); and
- The first 12 months of ownership if you could not live there because the property was being built, being renovated or you had not sold your previous home (this period may be extended to two years in exceptional circumstances).
*The Government announced in the 2018 Budget that this period will be reduced to 9 months from April 2020.
As well as this, certain other periods may be fully relieved from tax provided that you lived in the property as your main home at some time both before and after the period of absence:
- Any absence up to a maximum of three years (this may be one absence or a series of absences up to the three year maximum);
- Any absence where throughout that absence you were employed overseas and all your duties were performed overseas; and
- Any absence up to a maximum of four years (this may be one absence or a series of absences up to four years maximum) where either:
- You worked too far from the property to use it as your home; or
- You were required by your employer to live somewhere else.
If you are unable to return to live in the property because of work restrictions after one of the work related absences above, you can still count the period as a period of occupation.
You buy a house in May 2011, but do not move there until September 2011, because you were waiting for your previous home to be sold. Although you did not live there from May to September 2011, this is included as a period of occupation by you because it is less than 12 months and the reason for you not occupying the property was because you were waiting for your previous property to be sold.
In December 2011, your job moved location within the UK and it was impossible for you to commute easily. You rented another house until March 2015 when you took up a new job overseas.
In April 2018, you return to the UK to take up another position, resuming living in your property. The absence from December 2011 to April 2018 is fully relieved because:
- The period from December 2011 to March 2015 was an absence of up to four years where you worked too far from home; and
- The absence from March 2015 to April 2018 also qualified for relief because you were employed overseas and all your duties were performed overseas.
Note that the second period of absence above qualifies only because you have resumed living in the property.
How do I calculate any chargeable gain?
If you have not occupied your home (on an actual or ‘deemed’ basis) for the entire time you have owned it, then you may have to pay some CGT when you sell it.
You can find general information on how to calculate CGT in the main CGT section.
You can find detailed information about calculating a gain where there is only partial private residence relief in HMRC’s Helpsheet 283 on the GOV.UK website.
The important thing to realise is that any gain you make on the sale of your private residence is deemed to arise evenly over your period of ownership of the property. Thus if you owned the property for 8 years before selling it, and the gain on sale was £40,000, then the gain is deemed to have arisen at the rate of £5,000 per year (£40,000 divided by 8 years).
If you’ve only lived in your home (or been deemed to have lived in your home), for say 6 out of 8 years then 6/8ths of the gain will be exempt and 2/8ths will be chargeable (that is, £30,000 will be exempt and £10,000 will be chargeable). Remember you may use your capital gains tax exemption against this gain.
Another thing to note is that the gain is the difference between a) the amount you sell the property for and b) the amount you paid for it. If you have remortgaged the property and the amount of your mortgage is more than the amount you paid for the property you can still only use the amount you paid for it to calculate your gain. For example, you buy a property for £100,000, three years later you remortgage for £125,000 and then after you have owned the property for 8 years you sell it for £175,000. The gain is £175,000 minus £100,000 which is £75,000. The fact that you are only going to receive £50,000 once you have paid off the mortgage is irrelevant.
Is it different if I was living in service accommodation?
Service accommodation normally qualifies as ‘job-related accommodation’. A period during which you live in job-related accommodation is treated as a period of living in your main home. It is not treated as a period of absence and any gain arising for that period of time is fully free of tax provided that you intend to occupy your property when you leave the job-related accommodation. If you do not actually resume living in your main home after you leave the service accommodation, you will have to prove the date when you changed your mind about living there – and from that date the property will cease to qualify for private residence relief under this rule. You are still entitled to the relief that always allows the gain arising over the last 18 months of ownership to be exempt.
These specific rules, in combination with the more general rules on absences set out above, are likely to cover any periods of absence you have from your home due to armed service related activities, meaning CGT should not be in point.
How do these rules work where the property is jointly owned?
Normally each person’s share of a gain is calculated based on their own circumstances – but there are special rules for married couples and civil partners. Where one spouse or civil partner qualifies for private residence relief, for example because they are living in job-related accommodation, then the other spouse or civil partner will qualify.
If the property is owned by two or more people who are not married or in a civil partnership, then each person’s share of the gain is calculated separately. This means if you own a property with your life partner, but you are not married or in a civil partnership with them, their share of any gain on the sale of your private residence may not qualify for reliefs in the same way that any gain arising on your share of the property would.
I let out a room in our home. What effect does that have when I sell our home?
You should have been paying income tax on the property income arising from this activity unless your income fell within the rent a room provisions. Now that you are selling the property, the fact that you had a lodger should make no difference to the normal rules for selling a main home (see above), so long as you were physically living at the property while you had a lodger.
If, instead, you let out the property and did not live there yourself, or you let out a self-contained part of the property, you should look at the section below.
If you were running a business, such as a ‘bed and breakfast’ business from your home, you should take professional advice before you sell the property.
I rented out my property while I was living elsewhere. What effect does that have?
Should you sell the property at a later date, ‘lettings relief’ may be available to cover any ‘unrelieved’ periods of absence.
The first thing to do is to work out any capital gain arising. Next you should work out how much of the gain will be fully relieved because it was your private residence. Periods where the gain would be fully relieved, because you were in job-related accommodation for example, should be included here even if the property was let out during that time. If there is any unrelieved gain remaining, you need to work out how much of that unrelieved gain relates to the period of letting that has not been covered by any other relief. The amount of the unrelieved gain that relates to the period of letting can be reduced by letting relief.
Letting relief is the smaller of
- £40,000; and
- the amount of private residence relief available
John sold his property in April 2018, realising a gain of £150,000. The property was originally bought in April 2008. He had lived in the property for six months before moving to service accommodation for three years. After that, he left the armed forces and moved back to this property for a year. He then found another job and had to move away. At this stage he decided to let out the property.
Total period of ownership 10 years
Periods eligible for private residence relief:
Original stay in property 0.5 years
Job-related accommodation 3 years
Second stay in property 1 year
Last 18 months 1.5 years
Total 6 years
Of the gain of £150,000, 6/10 of that is fully relieved, leaving a gain of £60,000. All of that £60,000 gain is attributable to a period when the property was let.
We can use letting relief to reduce the gain of £60,000 which we have calculated above. In this case, private residence relief accounts for £90,000 (6/10 of £150,000), so letting relief is £40,000.
The capital gain arising on the property then becomes:
Total gain £150,000
Less: private residence relief £90,000
Less: letting relief £40,000
Gain liable to taxation £20,000
Remember you may use your capital gains tax exemption against this gain.
I am not resident in the UK. Do I still pay capital gains tax when I sell my home in the UK?
This is a complicated situation. The first thing to say is that if you are a UK resident, you may be liable to CGT on disposals of assets located anywhere in the world, not just your UK-located assets.
So, you should check that you are definitely not resident in the UK for tax purposes at the time you sell your home before going any further. Assuming you are not resident in the UK, then there are different scenarios to be examined.
Properties sold on or after 6 April 2015.
A new CGT charge was introduced from 6 April 2015 where a non-UK resident sells residential property in the UK. You can choose how to calculate the gain on which the charge is based in one of three ways:
- On the difference between a) the amount the property is sold for and b) its value at 6 April 2015. You will need to establish the value of the property at 6 April 2015; or
- Over the whole period of ownership and then time apportion it and the part of the gain that relates to the period from 6 April 2015 would be subject to these provisions; or
- If you owned the residential property before 6 April 2015 and sold it for less than it cost you then you can calculate the loss over the whole period of ownership but the way you can use this loss is restricted.
If you wish to choose options 2 or 3 you need to make an election to do so. Private residence relief may apply to any chargeable gain calculated under options 1 and 2.Where this new charge applies, it is the first charge to be applied to a sale of the property.
You must complete and submit to HMRC an online form telling them about the sale, within 30 days of completion of the sale. In addition, if you are not in the Self Assessment system you need to pay the tax due once HMRC send you an email with details of how to pay. If you are in Self Assessment, the tax will be due at the usual time.
You can read more about this charge on GOV.UK.
Note that you may also have a capital gains tax liability on any gain that is not captured above if you are a temporary non-UK resident.
Properties sold before 6 April 2015
You may have a capital gains tax liability if you are a temporary non-UK resident.
I bought a home overseas while I was working there. Do I pay capital gains tax when I sell it?
The first thing to check is whether you are liable to capital gains tax in the country where the property is situated.
As far as capital gains tax in the UK is concerned, it depends on your residence status when the property is sold.
If you are resident in the UK, then you need to calculate any gain arising, taking into account any private residence relief that might be available. If there is a gain arising, you need to calculate the tax payable. You may be able to set off any overseas capital gains tax that you have paid on this disposal against your UK capital gains tax bill. This is called Double Tax Relief. This is a complex area and if this applies to you, you may need to take professional advice.
If you are a temporary non-UK resident, then you need to perform the calculations as above when you return to the UK and you may have tax to pay.
If you are non-resident in the UK then no UK capital gains tax will be due.
Where can I find more information?
GOV.UK has some commentary and examples on family houses.
The HMRC Manuals have some information on Double Tax Relief.