What capital gains tax will you pay on the sale of your home?
The sale of residential property is chargeable disposal for the purposes of calculating capital gains tax. It’s calculated by deducting the acquisition cost and any allowable expenditure (such as incidental costs of disposal, or enhancement expenditure) from your sales proceeds.
There are, however, various reliefs available to exempt all or part of the gains made on disposal where certain conditions are met. The most generous of these is the ‘Principal Private Residence’ (PPR) relief, which we talk more about below.
If you have any unused capital losses arising in the same or earlier years, then these too could also be offset against a chargeable gain.
UK resident and/or domiciled individuals are also entitled to an ‘annual exempt amount’ for capital gains. This annual exempt amount is £12,300 for the 2022/23 tax year, so it’s only the total chargeable gains in excess of this that become taxable.
The rates of capital gains tax on disposals of residential property (after deduction of available reliefs, losses and the annual exemption) applicable to higher rate taxpayers is 28%. But note, if your total taxable income in the year of the disposal is less than £50,000 (for the 2022/23) then a proportion of your gains may be taxed at the lower basic rate of 18%.
Principle Private Residence (PPR) relief
As described above, PPR relief exempts all or part of a gain which arises on a property which you use as your home. You start by calculating the capital gain on the sale of the property by deducting the base cost and any enhancement expenditure from the proceeds. From this you deduct PPR relief to arrive at the chargeable gain.
To calculate the amount of the gain which is exempt, you multiply the gain by the following fraction:
Gain × Period of occupation of property/Period of ownership
From this you might notice that if you live in the property as your home throughout the whole period of ownership, 100% of the gain is exempt and no gain is chargeable.
For most people therefore, a capital gain made on the sale of their home will be completely exempt as it will be wholly covered by PPR relief. A gain will only arise where you have been absent from the property at some point during your period of ownership.
Certain periods of absence can, though, be treated as periods of occupation and these are known as the ‘deemed occupation’ rules (see below).
For married couples with more than one residence, you can nominate which property should be treated as your primary residence by notifying HMRC in writing, but note married couples are treated as a single entity for the purposes of applying PPR, so you cannot individually make separate claims to PPR relief on different properties.
It’s usually good practice to nominate the property that you think will give rise to the highest capital gain on a future disposal.
Deemed occupation
Certain periods of absence can be treated as occupation for the purposes of applying PPR relief.
To start, if a home has been your only or main residence at some point in time the last nine months of ownership are always treated as occupation for PPR relief, regardless of whether you were living there or not. In addition to this you might have some periods of deemed occupation.
It’s important to note that a period of absence (with the exception of the last nine months) can only be treated as a period of deemed occupation if it was both preceded and followed by a period of actual, physical occupation. Therefore, if you purchase a property, live in it for a while then move out, you can only count the period of absence as a period of occupation if you return to the property and live in the house again before selling it.
The legislation is pretty specific as to which periods of absence can count as deemed occupation. There are three periods of absence that will qualify:
Where the owner is abroad by reason of his employment, that period of absence can be treated as a period of deemed occupation. This period is unlimited.
Where the owner was absent from the property due to working elsewhere – either as an employee or as a self-employed trader – that period of absence will also qualify as deemed occupation. Here the period of deemed occupation is limited to a maximum of four years.
Finally, any period of absence up to a maximum of three years will qualify as a period of deemed occupation.
These three periods of deemed occupation can apply cumulatively, meaning that a longer period of absence may all qualify as deemed occupation, as certain periods can be added together.
A period of absence is treated as a period of deemed occupation if the individual is living with a spouse who meets one of the necessary conditions relating to work or employment.
Don’t forget that a period of absence will only qualify as deemed occupation if it was both preceded and followed by actual occupation. This means that you must return to the property and live in the house as your home, for the intervening periods to qualify.
For further guidance or advice in relation to property disposals contact us.