Capital gains tax
Capital gains tax (CGT) is a complicated subject so we provide an introduction only here. We do cover the main issues, though, and signpost you to where you may find extra help.
Capital gains tax basics
What is CGT?
CGT is a tax charged if you sell, give away, exchange or otherwise dispose of an asset and make a profit or 'gain'.
It is not the amount of money you receive for the asset but the gain you make that is taxed.
Broadly, to calculate the gain, you compare the sales proceeds with the original cost of the asset.
You can find a basic guide to CGT on the GOV.UK website.
When does CGT apply?
As noted above it applies when you sell, give away, exchange or otherwise dispose of an asset, although gains on some assets are specifically tax free.
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.
Non-residents are liable to CGT if they are carrying on a trade in the UK. Since April 2015, if you are non-resident (including in the overseas part of a split year), you may also be liable to CGT on the disposal of UK residential property (although main residence relief may apply).
There are special rules for CGT purposes that apply to individuals who are normally resident in the UK, but are temporarily resident outside the UK. We look at these in the section of our website about the armed forces (who are often posted overseas and so become temporarily non-resident).
You may have to pay CGT when you give an asset as a gift to someone.
The rules are different depending on who you give the gift to and there are special reliefs for gifts of business assets. We do not cover the relief for gifts of business assets in any further detail here, but you can find more information on the GOV.UK website.
It can also apply if you transfer assets on separation, divorce or dissolution of a civil partnership.
In some cases you are treated as if you have disposed of an asset. This might happen, for example, if a personal possession, such as an antique, has been destroyed and you have received a capital sum, such as an insurance payout, by way of compensation.
What is a capital asset?
It is a “thing” that you own such as a house, shares in companies or other possessions.
Do I pay CGT on assets I inherit?
You do not pay CGT when you inherit an asset, but you may have to pay CGT if you sell, give away or exchange an asset you inherited and it has increased in value since the date of death.
If the asset you inherited increases in value between the date of the deceased's death and the date you dispose of it, the increase is a 'capital gain'.
Are any assets free from CGT?
Yes and some of the most common examples are:
- Private motor cars, including vintage cars
- Gifts to UK registered charities
- Some Government securities
- Personal belongings (or ‘chattels’) where the sale proceeds are less than £6,000
- Prizes and betting winnings
- Assets held in ISAs
- Foreign currency held for your own use.
The sale of your main home is usually free of CGT but read our section on this below. Note carefully that this tax-free status does not extend to second homes or property which are rented out.
I have sold an asset for less than £6,000. Is this tax free?
It depends on what the asset was.
Shares are not exempt from CGT.
But a sale of a painting, jewellery or piece of furniture, for example, would qualify to be free from CGT as they are personal belongings or ‘chattels’. To qualify in this way, the asset has to be tangible – i.e. something that can be touched – and moveable.
My husband and I sold a painting for £10,000. Will that be free of CGT?
Yes, it will because each of you has sold your half share for less than £6,000.
I have just sold a ring for £9,000. Is the whole amount liable to CGT?
CGT is a tax on the profit you have made. If we assume the ring originally cost £2,000, then the gain would be £7,000.
There is a special rule to give some relief here, recognising that if the sales proceeds had been £6,000 no CGT would have been due at all.
The gain is restricted to a maximum of: (Proceeds of sale less £6,000) X 5/3.
In this case, that means that only £5,000 would be liable to capital gains tax rather than £7,000, i.e. (£9,000 - £6,000) x 5/3 = £5,000.
I have a table and six chairs that we are told will sell together for £12,000. Presumably because each item is worth less than £6,000, the whole amount is tax free?
No, in these circumstances where assets form sets and are sold together, they are treated as one asset for CGT purposes.
If, instead, the assets were sold separately it is possible that they could be treated as separate assets.
Be careful, this does not mean that you could gift the table to a family member and then a couple of chairs, and so on. The law makes it clear that such gifts would form a series of transactions and be linked together with the higher value.
You can read more about the ‘chattel’ rules on GOV.UK.
There is no CGT on the sale of your own home (or ‘main residence’) provided you have lived there throughout the time you owned it (the final 18 months of ownership are always treated as if you lived there, whether you did or not). This also applies if your home is a fixed caravan or houseboat.
If you rent out a room in your house, there will be no CGT on that portion if the lodger shares your living rooms, even though they also have a room of their own.
Otherwise, there are special rules if you lived elsewhere or you let your home for part of the time before you sold it. Please see GOV.UK for more information. You should also check our website section on the armed forces for more on how main residence relief applies in these circumstances. Please note that although the information is given in relation to armed forces who are often posted abroad, it is broadly relevant more widely.
If you have more than one house, you have up to two years from purchase of the second home to decide which one you want to be your main residence for CGT purposes. You need to let HMRC know what you decide within those two years, otherwise they decide which one is your main residence based on the facts, including, for example, how long you spend in the houses, where your ties are strongest and your intention.
A married couple or a couple in a civil partnership may only have one main residence between them for these purposes, regardless of the number of properties they own or how they own them.
This however, changes if the marriage breaks down and you become permanently separated, as set out in this HMRC guidance. If you have not separated under a court order or formal deed of separation, the question is whether you have separated “in such circumstances that the separation is likely to be permanent”.
Following such a separation, a couple can have different main residences. There is more on CGT when a marriage breaks down below.
What if I use my home for my business?
A lot of people run their businesses from home. If you do, you need to look at how you have used your home when you sell or dispose of it before you can work out if there is any CGT to pay.
What if I use rooms for both business and personal purposes?
If you use a room in your home for both business and private purposes – for example, you use a room as an office, but you also use it as a guest bedroom – your home will probably be exempt from CGT when you sell it.
What if I use a room solely for business purposes?
If you use any part of your home exclusively for business purposes – for example part of your home is used as a workshop for your business – that part will not be exempt from CGT. But you will still get the relief on the part used as your main home. This means that if you sell your home at a profit, you have to work out the amount of relief due and work out if there is any CGT to pay.
Look at the example Ailsa to see how business use of your house affects your CGT.
You can find detailed information about main residence relief in HMRC’s Helpsheet 283 on the GOV.UK website.
How do I work out the gain on disposal of an asset?
You normally work out your gain like this:
Proceeds or market value
Less: Original cost or market value
Less: Any incidental costs of purchase
Less: Any costs incurred in improving the asset
Less: Any incidental costs of sale
This then gives you the chargeable gain. Look at the example Neil to see how this works.
A few points to note:
In terms of proceeds, if you give away an asset HMRC will treat you as having sold it for what it is worth (i.e. the market value).
In terms of costs, unless you bought the asset, you will need to consider the market value of the asset when you acquired it.
If you are selling an asset you owned at 31 March 1982, you use the market value as it was on 31 March 1982 – the amount you could have sold it for on the open market – instead of your original cost.
When you improve or add to your asset, you can deduct this cost in the calculation (this will reduce the gain), but you can only include improvements, for example, an extension to a house, and not repairs.
Similarly, you can deduct the incidental costs of buying and selling in the calculation. Typical costs include legal expenses and estate agents' fees for property, and broker's commission on the purchase and sale of shares.
We discuss these elements further in our section below.
What if I only dispose of part of an asset (other than shares)?
Where you dispose of only part of an asset, you work out your cost by taking your sale proceeds and dividing them by the total of sale proceeds and the market value of the unsold part. This is then multiplied by your overall cost like this:
C x (SP / (SP + MVUP))
C = overall cost
SP = Sale proceeds
MVUP = market value of unsold part
This gives the cost of the part disposed of.
Look at the example Jenny to see how this works and then how the overall gain is calculated.
Small part disposals of land
If you sell part of a holding of land for £20,000 or less and the proceeds are not more than 20% (i.e. 1/5th) of the value of the whole piece of land, you can claim not to have made a disposal; but the amount of proceeds you receive is taken off your cost which is used to calculate any future disposal. This allows you to essentially put off having to think about the CGT consequences until a later date.
You cannot make the claim if you have other disposals of land in the same year and the total of proceeds for all disposals is more than £20,000.
What records do I need to keep for CGT?
If you make a taxable capital gain, you generally need to complete a self assessment tax return, so you need to keep relevant documents in connection with the gain or claim for losses or other reliefs. Essentially, you need records that, if necessary, will enable you to answer any queries from HM Revenue & Customs (HMRC).
When we refer to market value in the following guidance, we mean the price your asset might reasonably be expected to fetch on the open market.
You usually acquire an asset when you buy it, but you might also have inherited it, received it as a gift or some other way.
In all cases you need to keep records of the original cost, incidental costs associated with acquiring the asset and sometimes records showing the value of the asset on a specific date.
To help you keep check, you may need to keep a record of some or all of the following:
The original cost
If you bought the asset after 31 March 1982 you need to keep records showing the original cost of the asset – such as receipts for purchase. If these are not available you may need to get a valuation of the asset at that date from, for example, an estate agent or an auctioneer and you need to keep proof of any such valuation safe for future use.
If you received the asset some other way – for example by inheritance or gift – you need to find out the market value on the date you acquired it. If you inherited the asset, the executors of the deceased should have provided you with this information.
The market value at 31 March 1982
If you owned the asset on 31 March 1982, you need to work out the market value of the asset at 31 March 1982 and use this in your CGT calculations instead of your actual costs up to that date. You need to keep any records that help you do this.
You may need to get a valuation of the asset at 31 March 1982 from, for example, an estate agent or an auctioneer and you need to keep any such valuation safe for future use.
Market value at other dates
There are other times when you need to use the market value of the asset on a specific date in your CGT calculations instead of the cost.
For example, if you dispose of an asset left to you in a will by a relative who died on 23 January 2016, you use the market value on the date of death instead of any actual cost in your calculations.
Or, if you gave an asset to your child on 18 September 2018, you use the market value on 18 September 2018, the date of the gift, as the proceeds, instead of any amount received.
You may need to get a valuation of the asset from an estate agent or auctioneer. If you want you can get HMRC to check your valuation so that you have an agreed figure for your tax return. In that case you should complete and send form CG34 Post Transaction Valuation Check to HMRC after you have disposed of the property. You can find the form on the GOV.UK website.
Additional records you may need to keep
If you incurred other allowable costs when acquiring the asset – such as stamp duty (or land and buildings transaction tax in Scotland) and any fees paid for professional advice, estate agents costs, valuation fees or other costs of transfer including advertising – you need to keep a record of the amounts involved and any documents relating to that expenditure.
You deduct these costs in the calculation when working out any capital gain.
You can also deduct any VAT on the costs, unless you are VAT registered and can reclaim the VAT.
There are other costs during your ownership of an asset which can be deducted from the calculation for CGT purposes:
If you have spent money improving the value of your asset, you may be able to deduct these costs, as long as the improvement is still reflected in the value of the asset when you dispose of it. For example, if you build a garage to add value to your property – and it is still part of the property when you sell or dispose of it – you can deduct the cost of the garage.
You cannot however include maintenance costs, such as decorating or any repairs.
You can also deduct any VAT paid out on improvements, unless you are VAT registered and can reclaim the VAT.
Confirming you own the asset
If you spend money proving that you own or have rights over an asset you may be able to deduct this cost.
When you dispose of your asset
You usually dispose of an asset when you sell it, but you may also give it away, exchange it for another asset, transfer it to someone else or it may have been lost or destroyed.
In all cases you need to keep records of the 'disposal proceeds' – usually the amount you receive – and sometimes records showing its value on a specific date.
You also should keep records of the amount you receive if you otherwise dispose of the asset – this may include, for example, a sum received as compensation for a damaged asset.
Any extra costs
If you spend money selling or otherwise disposing of an asset – such as legal fees, valuation fees or advertising costs to find a buyer – and you deduct these in your CGT calculation, you need to keep records of these costs.
What is the annual exemption?
Each tax year, most individuals who are resident in the UK are allowed to make a certain amount of capital gains before they have to pay CGT. This is because they are entitled to an annual tax-free allowance, called the annual exemption or annual exempt amount.
For 2018/19 you may make gains of £11,700 tax free. Any unused exemption cannot be carried forward or back.
Individuals who are resident in the UK, but not domiciled here, and who use the remittance basis of taxation (other than in the case where the remittance basis applies automatically because unremitted foreign income and gains are less than £2,000) are not entitled to the annual CGT exemption.
Individuals who are non-resident who may be liable to CGT on the disposal of UK residential property are entitled to the annual CGT exemption.
Does each spouse or civil partner get their own annual CGT exemption?
Yes, they do.
What rate is CGT charged at?
The rate of CGT you pay depends partly on what type of chargeable asset you have disposed of and partly on the tax band into which the gain falls when it is added to your other taxable income.
From April 2017, CGT is charged at the rate of either 10% or 18% for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20% or 28%. If you are normally a basic-rate taxpayer but when you add the gain to your other taxable income you are pushed into the higher-rate threshold, then you will pay some CGT at both rates.
Gains on most chargeable assets are subject to the 10% or 20% rate, depending on whether the taxpayer is a basic rate or higher/additional rate taxpayer. Chargeable gains on disposals of residential property that do not qualify for main residence relief are subject to the 18% or 28% rate.
If you live in Scotland and are a Scottish taxpayer, the same rules as explained above apply to you. You must use the UK rates and bands.
How do I work out the tax I will pay?
As noted above there are two main sets of rates of CGT, 10%/18% and 20%/28%. The rate you pay depends upon the amount of your total taxable income.
When you take your personal allowances and any other deductions such as allowable work expenses from your income you arrive at a figure we call your total taxable income.
If you are taxed at the basic rate of tax on your total taxable income, you pay CGT at 10% (or 18% if the asset disposed of is a residential property) on any capital gains falling within the basic rate band.
If you have income taxable at the higher rate of 40% and/or the additional rate of 45% your capital gains are taxed at the 20% (or 28% if the asset disposed of is a residential property) rate.
So if your total taxable income and gains after all allowable deductions – including losses, personal allowances and the CGT annual exemption – are less than the upper limit of the basic rate income tax band (£34,500 for 2018/19), the rate of CGT is 10% or 18%. For gains (and any parts of gains) above that limit the rate is 20% or 28%.
Look at the example Jon part one to see how this works.
If you live in Scotland and are a Scottish taxpayer, the same rules as explained above apply to you. You must consider your total income and gains in relation to the UK rates and bands to work out your CGT, even if you pay income tax at the Scottish rates and bands on your salary, self-employed profits, rental income or pension.
Look at the example Jon part two to see how this works.
Do I have to pay CGT when I gift an asset?
If you gift an asset to someone, you may have to pay CGT. The rules you follow depend partly on who you make the gift to.
Do I have to pay CGT when I gift an asset to my spouse/civil partner?
No, you do not pay CGT when you make a gift to your husband, wife or civil partner - as long as both of the following apply:
- you lived together for at least part of the tax year in which you made the gift; and
- the gift is not of ‘trading stock’ (trading goods bought for resale).
However, if your husband, wife or civil partner later sells or otherwise disposes of the asset, they will have to pay the tax on any gain made over the total period of ownership, since the date it was first acquired by you (or 31 March 1982, if later). In other words, the recipient spouse or civil partner is treated as having owned the asset from the date the transferring spouse acquired it.
If you are separated or divorced or your civil partnership has been dissolved, read our section below on what happens on the breakdown of marriage or civil partnership.
It is worth keeping a note of what the asset cost you, as your spouse or civil partner may need this to work out their CGT when they dispose of the asset.
Look at the example Ann to see how this works.
Do I have to pay CGT if I make a gift to another family member?
When you make a gift to a family member or other person you are 'connected' with (as described below) – other than your spouse or civil partner in the circumstance described above – you need to work out the gain or loss. This also applies if you dispose of an asset to them in any other way, for example, you sell it to them for less than it is worth.
In these cases, you may have to use the asset’s market value, rather than the value of the actual proceeds you receive, to work out the gain or loss.
If you make a capital gain, you may have to pay CGT.
If you make a loss on a gift you make to a connected person you can only deduct the loss from gains you make on gifts or other disposals to the same person.
A connected person in this context could be, for example:
- your husband, wife or civil partner if you don’t remain living together;
- your brothers, sisters, parents, grandparents, children, grandchildren and their husbands, wives or civil partners;
- the brothers, sisters, parents, grandparents, children, grandchildren of your husband, wife or civil partner - and their husbands, wives or civil partners;
- a company you control.
You must get a valuation of the asset at the time you made the gift and use this value in place of any amount you received for the asset – usually nothing, if it is a gift – to work out your gain or loss. You can agree the valuation with HMRC before you submit your tax return by completing form CG 34. You can find this form on the GOV.UK website.
What if I sell assets I own jointly?
Each of you is usually liable to tax on your half of any gain arising, assuming the asset is owned equally. If it is not, you are each assessed to tax based on your share of the underlying asset.
How do I report capital gains to HMRC?
If you normally complete a tax return, you report your capital gains on a self assessment tax return, using the capital gains pages. If you usually submit a paper tax return, you can find the specific pages on the GOV.UK website.
You need to use these pages if your gains are more than the annual exemption for the year or if your sales proceeds are more than £46,800 (for 2018/19) even if your gains are less than £11,700 (for 2018/19).
If you are a non-resident who makes a disposal of a UK residential property, you need to report the disposal of the property to HMRC within 30 days of transferring ownership, even if there is no tax to pay. There is information about this on GOV.UK.
I do not normally complete a tax return. How do I report my gains?
You have a choice.
You can report your gains using the online service on GOV.UK. You need a Government Gateway account to do this, which you can set up as part of the reporting process. If you report your gains in this way, you will activate your personal tax account, if you have not already activated this. This means you do not need to wait until after the end of the tax year to report your gains in a tax return.
Alternatively, you can contact HMRC and register for a self assessment tax return by completing form SA1, which you can find on the HMRC website, or telephoning the self assessment helpline. You can find the details on the GOV.UK website. You should tell HMRC that you want to complete a tax return by 5 October following the end of the tax year for which you have CGT to pay (or losses that you want to notify to them for carrying forward).
If you are unlikely to need to complete a tax return again in the future, as soon as you have sent in this tax return, write to HMRC requesting that you be removed from self assessment so that they do not keep on sending you tax returns to complete.
What is the date of disposal?
The date of disposal is the date that you enter into an unconditional contract.
This means that for property, this is the date that contracts are exchanged and not the date of completion when you actually take possession of the property.
For shares, it is the date the bargain actually took place and not the date of the contract note or the date of settlement.
If, instead, you enter a conditional contract, the relevant date is the date when the conditions are satisfied.
What if I get some sale proceeds at a later date?
When you sell an asset, sometimes you receive only part of the money at the date of sale. You may receive further amounts later and some may be dependent on future events. This is called deferred consideration.
Depending on the type of deferred consideration involved, you may need to take it into account immediately when working out your gain or loss for the disposal even you do not receive it until sometime later.
Generally, if you know the amount of money that you will be receiving, even if it is not payable until a later time, then you include it when calculating the gain or loss.
For example, if the deferred amount consists of an immediate payment followed by a number of annual instalments, the figure of total proceeds is known in the year of disposal and should be included in your CGT computation even though the actual money will not be received until later.
We are not going to look here at the situation where the amount of the deferred payment is not known as this is more complicated and may require a valuation of the deferred amounts.
Where the disposal proceeds for an asset are payable to you by instalments, you may, in certain circumstances, ask HMRC if you can pay any CGT due by instalments (in recognition that you may not have the money to pay the CGT otherwise).
This relief is available where the instalments, as set out in the contract for sale of the asset:
- begin no earlier than the date of disposal of the asset; and
- extend over a period exceeding 18 months; and
- continue beyond the date on which the tax would otherwise be due and payable.
What if I make a loss?
You first set any loss against any other gains in the same year even if the gains are covered by your annual exemption (this means you may waste your annual exemption).
If, after doing this, you still have losses remaining, you should let HMRC know so that you can carry them forward and use them in a later year. You cannot carry losses back (except where assets have been disposed by a taxpayer in the part of a tax year before death).
You cannot claim a loss made on an asset that is exempt from CGT.
Look at the example Eileen to see how you can use a capital loss.
If you have a capital asset that is lost or destroyed you treat this as a disposal.
If you receive compensation, the amount of compensation you receive is treated as the sales proceeds.
If you do not receive any compensation, your sales proceeds are effectively nil. So you may be able to claim relief for a loss.
This is similar to the negligible value claim for shares.
Will I get a capital gain if I sell some shares?
Below we try to explain as simply as possible the rules that apply to the purchase and disposal of your shares in public companies such as BT plc or Tesco plc. It is intended to help you work out the capital gain or loss if you have disposed of shares. For most people, with modest shareholdings, any gain from the sale of shares will probably fall within the annual CGT exemption.
We normally refer to purchases and sales as these will be the most common events, but remember that a CGT charge can also arise when shares are gifted.
If your circumstances are more complicated – for example if there has been a reorganisation of your shareholding by the company involved or if you got some free shares – you should talk to HMRC or seek professional advice. You can find a tax adviser on the Chartered Institute of Taxation website.
Shares of the same class in the same company are identical. Suppose you have a holding of 10,000 Albatross plc 25p ordinary shares acquired at different times for different prices. You then sell 2,000 shares. To calculate the gain you need to know firstly, which shares you have sold and secondly, how much they cost.
For historical reasons, shares of the same class in the same company may be grouped in different ways. The following list shows the order that identifies which shares you have sold:
- purchases on the same day as the sale or disposal;
- purchases within 30 days after the day of sale or disposal;
- the rest of the shares you hold (these are treated as being held in a pool and acquired at their average price);
- purchases more than 30 days after the day of sale or disposal.
Any shares you held before 31 March 1982 are treated as if you bought them at what they would have cost on that date – we call this the 31 March 1982 value.
Jason has made the following purchases and sales of BT shares:
1 April 2012 – bought 1,000 shares for £1 each
1 April 2013 – bought 500 shares for £1.50 each
1 May 2018 – sold 500 shares
15 May 2018 – bought 100 shares for £2 each
For CGT purposes, the 500 shares sold on 1 May 2018 are deemed to be:
100 shares bought on 15 May at a cost of £200
400 shares from the pool at an average cost of £1.16 each (£464)
Jason’s total cost for his CGT calculation is £646.
You can find some basic information on calculating gains on shares on GOV.UK.
You can find some detailed information in HMRC’s Helpsheet 284 on GOV.UK.
Sometimes shares you own may lose all or most of their value. This happens when the company involved either just stops trading or goes into liquidation or receivership.
If you own shares that are now of no value and therefore worthless, or almost worthless, you might be able to make a ‘negligible value claim’.
When you make a negligible value claim, if all the conditions are met, you are treated as if you sold the shares and then bought them back again at their value (thereby creating a loss) on the earliest of the following dates:
- the date that HMRC receive the claim; and
- a date you specify on the claim that may be in either of the two previous tax years, if the shares became worthless or almost worthless at that time or earlier. (This basically allows you to treat the loss as arising in a different tax year – this may be important if you have large gains in one of the two years to help you minimise any capital gains tax bill.)
You then work out your capital loss as if you sold the shares for their negligible value on that date.
If the shares that have become worthless are not in a company quoted on the stock exchange, but in a private company, for example, a family trading company, you may be able to set off your loss against income of the same tax year in which the loss is made or the previous one. For more detailed information have a look at HMRC Helpsheet 286, which you can find on the GOV.UK website.
If you do not normally complete a tax return, you should write to HMRC to claim any capital losses or you may lose them. You can find an address for HMRC on the GOV.UK website. In these circumstances you normally have four years from the end of the tax year when you want to make the claim to actually make the claim for losses.
Entrepreneurs' relief may apply to you if you dispose of the whole or part of a trading business, or shares in a trading company in which you have a qualifying interest. It can also apply to the disposal of assets which were used in a business after you have ceased trading.
You have to make a specific claim for entrepreneurs' relief on you a self assessment tax return. You must claim the relief in respect of a qualifying business disposal on or before the first anniversary of the 31 January following the tax year in which you made the qualifying business disposal.
This can be a complicated area so if you think the relief applies to you, you should contact HMRC or a tax adviser for further advice. You can find a tax adviser on the Chartered Institute of Taxation website.
This is a stressful time for all concerned, but you do need to consider tax issues as the costs might be significant. As well as this section you should read the section on personal allowances.
After I separate from my spouse/civil partner, can I still transfer assets between us free of CGT?
You can only do this up to the end of the tax year in which you separate – so if you separate in November 2018, you can only transfer assets between you free of CGT up to 5 April 2019.
After this, in general terms, the transfer of assets between spouses after the tax year of separation will be treated as gifts and therefore liable to CGT. However main residence relief may be available if the asset being transferred is the family home.
As the house is jointly owned, your share of the proceeds will remain free of CGT as it is your main home. Any profit on your spouse/civil partner’s share may be liable to CGT. If the property is sold within 18 months them moving out, then the exemption from CGT for their main residence will apply to the period of absence; after that a proportion of their gain will become liable to tax (but see below). Before 6 April 2014, this exemption continued for three years from the date of leaving the property.
Your spouse/civil partner will still have their annual exemption to use against this gain, if they have not used it elsewhere, and will be able to use any capital losses they have.
There is a special relief available where, in connection with a permanent separation or divorce or dissolution of civil partnership, the leaving spouse or civil partner spends more than 18 months away from the former home. The conditions are:
- the property is transferred to the remaining spouse or civil partner as part of a financial settlement (e.g. an agreement between the spouses or an order of the court); and
- no other property becomes a main residence, for the purposes of this relief, of the leaving spouse or civil partner; and
- the property in question remains the main residence of the remaining spouse or civil partner.
If these conditions are met, the leaving spouse or civil partner will still obtain full relief from CGT on the sale of the property.
I own the family house but my spouse/civil partner and I have separated and I now have my own flat. What happens when the family house is sold?
You should consider the example Harold to see what happens in this situation.
Neil bought a holiday house in March 1979 for £10,000. Neil already had another home of his own. By 31 March 1982 the value had increased to £25,000.
In July 2018 Neil sold the holiday house for £200,000. He had legal costs of £1,000 on the purchase of the house and £2,500 legal and estate agents costs on the sale. Neil had improved the house by building an extension costing £15,000 in May 2001.
|Neil's gain is:||£|
|Less:||March 1982 value||25,000|
|Cost of extension||15,000|
|Legal expenses on purchase||1,000|
|Legal expenses on sale||2,500|
Jenny sells 1 acre of land for £10,000 which is part of a 5-acre field. The other 4 acres are worth £70,000 at the time she makes the disposal, as they are more likely to have development value in future than the acre just sold.
Jenny paid £20,000 for the whole 5 acres 15 years ago.
In working out her capital gain on disposal of the 1 acre, she will deduct a cost figure calculated as follows:
|Cost £20,000 x||£10,000 (sale proceeds)|
|£10,000 (sale proceeds) + £70,000 (value of part retained)|
£20,000 x £10,000/£80,000 000 (£10,000 + £70,000) which equals £2,500
So, without taking anything else into account, Jenny's gain on the 1 acre sale will be her proceeds of £10,000, less a cost of £2,500 = £7,500
Alternatively, Jenny could decide to simply deduct the sales proceeds of £10,000 from the cost price, leaving her with a base cost of £10,000 to be used against any future disposals. This is using the relief for small part disposals of land.
In 2018/19 Jon’s taxable income, after all allowable deductions and the personal allowance, is £24,500. Jon is not a Scottish taxpayer.
The upper limit of the income tax basic rate band is £34,500.
In November 2018, Jon sells an asset, making a gain of £26,200. Jon has no allowable losses to set against these gains, and the annual exemption for 2018/19 is £11,700.
There is £10,000 left in Jon’s basic rate band (£34,500 - £24,500).
Jon sets the annual exemption against the gain leaving £14,500 taxable (£26,200 - £11,700).
The first £10,000 of the £14,500 gain is taxed at 10% and the remaining £4,500 is taxed at 20%. If the asset John sold is a residential property (but not his main home), the rates of tax he pays are 18% on the first £10,000 and 28% on the remaining £4,500 of the gain.
In part two, we consider the position if Jon is a Scottish taxpayer.
Jon’s taxable income for 2018/19, after all allowable deductions and the personal allowance, is £24,500.
The higher rate threshold in Scotland is £31,580. Jon pays Scottish income tax at the starter rate of 19% on £2,000 of his taxable income, at the basic rate of 20% on £10,150 of his taxable income, and at the intermediate rate of 21% on £12,350 of his taxable income.
In November 2017, Jon sells an asset, making a gain of £26,200. Jon has no allowable losses to set against these gains, and the annual exemption for 2018/19 is £11,700.
When looking at his gain of £26,200, Jon must use the UK rates and bands. So, Jon’s taxable income is £10,000 less than the upper limit of the UK basic rate band (£34,500 - £24,500).
Jon sets the annual exemption against the gain leaving £14,500 taxable (£26,200 - £11,700).
The first £10,000 of the £14,500 gain is taxed at 10% and the remaining £4,500 is taxed at 20%. If the asset John sold is a residential property (but not his main home), the rates of tax he pays are 18% on the first £10,000 and 28% on the remaining £4,500 of the gain.
Ann bought a cottage in 1996 for £50,000. In August 2004 when the cottage was worth £90,000 she gave it to her husband, James. In June 2018 James sold the cottage for £140,000.
James’s gain on the property before any other deductions will be £140,000 less the original cost of £50,000, which is a gain of £90,000. It will not be £50,000 (i.e. £140,000 - £90,000).
Eileen bought some shares in August 2002 for £22,000. In August 2017 she sold them for £5,000.
Eileen has made a loss of £17,000, which she must use against any gains she makes in the same tax year 2018/19. If she has no gains or not enough gains, she can carry the loss (or balance of any unused loss) forward against any gains she makes in future years.
Ailsa uses 30% of her home exclusively as business premises and the other 70% is used as the area where she lives. When she later sells her home she makes a gain of £120,000.
Ailsa is entitled to Private Residence Relief of £84,000 on the part used as her home (70% of £120,000).
She will have CGT to pay on the remaining gain of £36,000 (£120,000 less £84,000).
Harold and his wife Sandra separated in June 2017.
The family home was purchased in December 1996 and was held in Harold's name only.
Harold moved out of the family home in June 2017 and into a new flat, which becomes his main residence for CGT purposes. The family home is sold in September 2018. As this is within 18 months of the date Harold moved out of the house, there will be no taxable capital gain.
If however the house is sold in December 2020, the first 18 months after he moved out of the house will continue to qualify for relief from capital gains tax and only the remaining two years will be treated as taxable. The total period Harold owned the house is 24 years.
If the gain on the sale of the house is £144,000, the amount on which Harold is liable to CGT is:
2/24 x £144,000 = £12,000
The £12,000 will be reduced by Harold's annual exemption for 2020/21 and he will just pay CGT on the balance, if any.
Where can I find more information?
You can find a collection of information on CGT on the GOV.UK website.
For HMRC’s detailed and technical CGT information see the CGT manual.
For information on rates and allowances for CGT, look at our 'useful tools section'.
You may also find the following sections of this website helpful: