Capital Gains Tax is paid when an individual makes a gain on an asset they have disposed of. For basic rate payers this is charged at 10% for chargeable assets, and 18% for residential properties. This is increased by 10% for higher and additional rate taxpayers (those who earn over £50,000 in taxable income).
There are many reliefs available to mitigate CGT liabilities such as Business Asset Disposal relief, rollover relief and gift relief.
One particular relief available to an individual disposing their residential home is Private Residence Relief (PRR), which is automatically applied when a property is sold.
In order to benefit fully, the property must be the seller’s main home or a dependent of theirs has lived in the property. This relief will only apply to non-investment properties, however it can even be utilised when the seller disposes a buy-to-let property depending on whether they’ve lived in the property at any stage.
Tax when disposing an additional property
When disposing a second home which has increased in value, HMRC would deem this gain as taxable. However, some PRR could still apply if the following factors are met:
- If the property was ever your main residence
- You let part or all of the property
- Whether you used the property for business
- The grounds cover less than 5,000 sq metres
How to calculate PRR
As a landlord, the relief obtained depends on the financial gain made from selling the property and the amount of time lived there. You will always get full relief for the years lived in the home and as of April 2020, the last nine months you owned the home – even if you weren’t living there at the time.
For example, if you lived in a property for two years before letting out for nine months, you will receive relief for 33 months (24 months + last 9 months of owning the property). You will then work this out as a percentage of the total ownership period, and this percentage figure will be available to utilise Private Residence Relief against the gain. The remaining amount will be chargeable to CGT.
If the property was sold between 6 April 2014 and 6 April 2020, you are able to obtain relief for the last 18 months that the property was owned.
Once the eligible relief has been calculated, the gains will need to be reported to HMRC by 31 January following the tax year it relates to.