Taxation in property - Capital Gains Tax

Learning Outcomes

This article covers Capital Gains Tax in property transactions, including:

• When CGT arises on disposals of property by individuals, trustees, and personal representatives
• What counts as a chargeable asset and a chargeable gain, and when market value is substituted (gifts, probate value)
• The principal private residence relief, with final period exemption and permitted absences
• Distinguishing residential and non‑residential gains and the applicable tax rates
• The effect of exclusive business use, mixed use, large grounds, and garden‑only sales on relief
• Calculating gains and identifying allowable costs (SDLT/LTT, capital enhancements, incidental acquisition/disposal expenses), and using losses and the annual exempt amount
• Elections where more than one residence is owned and how HMRC determines the main residence
• Special rules for spouses/civil partners, trustees, personal representatives, companies, and non‑residents
• 60‑day reporting and payment obligations for UK property disposals and interaction with self‑assessment
• Applying these principles to SQE2‑style scenarios and advising on records, valuations, and deadlines

SQE2 Syllabus

For SQE2, you are required to understand the major elements of how Capital Gains Tax applies to property transactions, with a focus on the following syllabus points:

• Explaining when and to which disposals CGT applies in property law.
• Distinguishing between residential and non-residential property for CGT purposes.
• Identifying reliefs and exemptions such as principal private residence relief.
• Calculating chargeable gains and advising on common reporting deadlines.
• Applying principles in client scenarios, including recognising who is liable and what records must be kept.
• Understanding permitted absences and the final period exemption for principal private residence relief, including the extended period for disability or moving into care.
• Advising on elections where a person has more than one residence, and how exclusive business use affects relief.
• Recognising special rules for trustees and personal representatives, and non‑residents disposing of UK land.
• Explaining when market value is substituted for actual consideration (for example, gifts) and how to evidence valuations.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Who is liable for Capital Gains Tax when a UK resident individual sells an investment property in England?
2. What main exemption may apply to reduce or remove a CGT charge on the sale of a person's only or main home?
3. If a property is jointly owned, how are any capital gains treated for CGT?
4. What is the CGT reporting deadline following completion of a residential property sale with a gain?

Introduction

Capital Gains Tax (CGT) frequently arises in property practice, especially when advising sellers of second homes, investment properties, or land. For SQE2, you must be able to identify when CGT applies, what counts as a relevant gain, outline key reliefs, and perform basic calculations for individuals and trustees. You should also be confident about the strict 60‑day reporting and payment regime for UK residential property gains and how principal private residence (PPR) relief operates in everyday scenarios (including periods of absence, mixed use, and large gardens).

When does Capital Gains Tax apply in property?

CGT is a tax payable by individuals, personal representatives, and trustees when they dispose of a chargeable asset and make a chargeable gain. Disposals include selling, gifting, or exchanging assets such as houses, flats, land, or commercial properties. CGT does not apply to UK companies, who are liable to Corporation Tax on chargeable gains instead.

Key Term: chargeable gain
The taxable profit or gain that arises when the proceeds from disposing of a chargeable asset exceed the acquisition cost, after certain allowable deductions.

Key Term: chargeable asset
Any asset capable of giving rise to a gain under CGT rules, including land, buildings, and interests in UK property or land.

Individuals are liable to CGT when they sell a property that is not their main residence, such as a buy-to-let flat or an inherited house. CGT is also payable by trustees when they dispose of a trust property. In the case of jointly-owned property, each owner is assessed individually on their share of the gain. UK‑resident individuals are generally chargeable on disposals of worldwide assets; non‑UK residents are chargeable on disposals of UK land (both residential and non‑residential) and certain interests in “property‑rich” entities.

When a disposal is by way of gift (or otherwise at undervalue), market value is substituted for the actual consideration to prevent manipulation of the charge. For inherited property, the acquisition cost is the value at the date of death (the probate value). For very old holdings, a 31 March 1982 base value rule may be relevant, though it rarely arises in modern practice.

Key Term: disposal
A transaction that triggers CGT, including sales, gifts, or exchanges of chargeable assets.

Principal private residence relief

The main exemption from CGT for individuals is the principal private residence (PPR) relief. This applies where a property has been the person’s only or main home throughout their period of ownership.

Key Term: principal private residence relief
An exemption that removes or reduces CGT on the gain from the sale of a property that has been the owner’s main residence for the duration of ownership, subject to certain conditions.

If PPR relief fully applies, no CGT is payable on the gain. If the property was not always the main home, partial relief may be available. Typically, the final nine months of ownership are always treated as exempt, even if not occupied. This final period extends to thirty‑six months where the owner is disabled or has moved into a care home. Other permitted absences that count as deemed occupation include:

• Up to twenty‑four months at the start of ownership while selling a previous home or carrying out building/refurbishment works before moving in.
• Any period(s) amounting to up to three years in total for any reason during ownership.
• Any period where all duties of employment are performed overseas (applies also to the employment of a spouse/civil partner).
• Up to four years’ absence required by employment elsewhere in the UK where distance prevents living at home; this can continue beyond four years if it remains impossible to return due to the ongoing employment requirement.

If any part of the property was used exclusively for business, or if the property’s grounds exceed a permitted area (normally half a hectare), relief may not apply to that part. Grounds exceeding 0.5 hectares can still qualify if they are necessary for the reasonable enjoyment of the residence, having regard to the size and character of the dwelling.

Where an individual owns more than one residence, only one can be the main residence for PPR at any given time. The taxpayer can elect which property is treated as the main residence for CGT purposes by making an election within two years of acquiring a second residence. Elections can be varied by later notice if circumstances change.

Lettings relief now has a very limited application. Since April 2020, it is generally only available where the owner shared occupation with the tenant. Classic lettings relief for periods when the entire property was let, without shared occupation, no longer applies.

Worked Example 1.1

A client has owned and lived in their house for 12 years. During the last year of ownership, they let the whole property while working overseas. They then sell the home. Does CGT apply?

Answer:
The property is their principal private residence for the period owned, and the final nine months of ownership are treated as exempt. Provided the letting does not displace the final period exemption and no exclusive business use or excess grounds issues arise, full PPR relief should eliminate the gain. Note that modern lettings relief would not be relevant unless the owner shared occupation with the tenant.

Calculating the chargeable gain

To calculate CGT, deduct the original purchase price and any allowable costs (such as significant improvements and legal fees) from the disposal proceeds. This figure is the chargeable gain.

If an asset was gifted, the market value at the date of the gift is used. For inherited property, the value at the date of death is the acquisition cost. Losses may offset gains. Each individual has an annual exempt amount (the annual CGT allowance).

Allowable costs typically include:

• Incidental costs of acquisition and disposal (for example, conveyancing fees, valuation fees, and estate agent commission).
• Stamp Duty Land Tax (or LTT in Wales) paid on acquisition.
• Capital enhancement expenditure (such as extensions, structural alterations, and new rooms). Routine repairs and decoration are not enhancement costs.

Once the gain exceeds the exempt amount, the part of the gain falling within the individual’s basic rate band is taxed at 18% for residential property (10% for other chargeable assets), with a higher rate of 24% (residential) or 20% (non‑residential/other assets) above that. Trustees and personal representatives broadly pay 20% on most gains and 24% on residential property gains. Rates and allowances can change; check the tax year in question. For example, the annual exempt amount was £6,000 for 2023/24 and is £3,000 for 2024/25 for individuals (trustees typically have one‑half of the individual amount, subject to trust limits).

Key Term: annual exempt amount
The amount of gains an individual (£6,000 for tax year 2023/24) or trustee can realise each year tax-free before CGT is charged.

Gains and losses are aggregated for the tax year. Capital losses are automatically set against gains; unused losses can normally be carried forward to offset gains in later years.

Worked Example 1.2

A landlord sells a buy-to-let for £300,000, which they bought for £200,000. They spent £10,000 on new windows. Sale costs were £5,000. What is the chargeable gain?

Answer:
Gain is £300,000 (sale) minus £200,000 (purchase), less £10,000 (capital improvements), less £5,000 (sale costs) = £85,000. SDLT paid on purchase, if any, would also be added to base cost. The available annual exempt amount is deducted before CGT is assessed. The portions of the gain falling within basic and higher rate bands are taxed at 18% and 24% respectively for residential property.

Report and pay within strict deadlines

Sellers of UK residential property with taxable gains must report and pay any CGT within 60 days of completion. Trustees and personal representatives have similar rules.

Where non-residents sell UK property (residential or non‑residential), special reporting and payment rules exist, requiring a report within 60 days of completion in all cases—whether or not there is tax to pay. UK‑resident sellers only need to file the 60‑day UK property disposal return if there is CGT to pay; otherwise, the gain is reported on the normal self‑assessment return. Payment is due at the same time as the 60‑day filing for reportable disposals.

Keep accurate records of dates, costs, valuations, and use (including evidence of occupation and permitted absences) to support any claims and the computation. Late filing and late payment trigger interest and penalties.

Exam Warning

Failing to report and pay CGT on time after a property disposal can result in penalties and interest. For SQE2, always advise clients to check deadlines.

Other common CGT issues

• Transfers between spouses or civil partners living together are usually on a no gain/no loss basis, deferring any gain until a later disposal.
• CGT may apply to gifts made to individuals or to trusts. Market value is used for the disposal and acquisition.
• If a property includes land in excess of 0.5 hectare (unless needed for reasonable enjoyment), only part qualifies for PPR relief.
• For mixed-use properties (part residence, part business), apportion the gain. Exclusive business use areas do not benefit from PPR relief; dual use (for example, a room also used by the household) may preserve full relief.
• Companies selling property pay Corporation Tax on gains, not CGT.
• Trustees may claim PPR relief if the occupier is entitled to occupy under the terms of the settlement (for example, a life tenant).
• Personal representatives acquire estate assets at probate value; PRs have CGT responsibilities on disposals during administration, with specific annual exempt amount rules and reporting obligations.
• If only garden land is sold while retaining the house, PPR can apply provided the land is within the permitted area and forms part of the garden/grounds. If the house is sold and garden land is retained, a later sale of the land is normally chargeable.

Worked Example 1.3

Two siblings inherit and sell a flat. Their late mother bought the flat for £100,000, and at her death it was worth £180,000. They sell for £200,000. What is the gain per sibling?

Answer:
Base cost is the market value at date of death (£180,000). The siblings together gain £20,000 (£200,000 sale less £180,000 base), so each has a £10,000 gain. Their individual annual exemptions apply.

Worked Example 1.4

A couple own a house with 1.2 hectares of grounds. The property has been their only residence for 20 years. The grounds include paddocks and woodland typical of the house’s character. They sell the whole for a gain. How does PPR apply?

Answer:
PPR automatically covers gardens/grounds up to 0.5 hectares. Land beyond 0.5 hectares qualifies only if required for the reasonable enjoyment of the residence, considering the property’s size and character. If HMRC accepts that the larger area is necessary, full relief can apply; otherwise, apportion the gain so that the excess land over 0.5 hectares remains chargeable.

Worked Example 1.5

An individual has two residences. They buy a city flat in January and keep a country cottage they have owned and occupied for years. They live in the flat during the working week and at the cottage at weekends. What should they consider for CGT?

Answer:
Only one property can be the main residence for PPR at a time. They can elect within two years of acquiring the second residence which is the main residence for CGT. Elections are flexible and can be varied later if circumstances change. Without an election, HMRC will determine the main residence on the facts (quality and degree of occupation).

Worked Example 1.6

A sole trader uses a room exclusively as a studio in their home and later sells the property. PPR otherwise applies. What is the effect on CGT?

Answer:
Exclusive business use of part of the dwelling restricts PPR relief for that portion. The gain must be apportioned: the studio area does not qualify for PPR. If the studio had dual use (for example, shared family use), full relief might be preserved.

Key Point Checklist

This article has covered the following key knowledge points:

• CGT applies to gains on disposing of property except where reliefs or exemptions (such as PPR relief) are available.
• PPR relief removes or reduces CGT if a property has been the owner’s main residence throughout ownership, within limits.
• The gain is calculated as proceeds minus original cost and allowable expenses (including SDLT/LTT and capital enhancements).
• Each individual has an annual exempt amount for CGT; rates and allowances change between tax years.
• Residential disposals must be reported and paid within 60 days of completion where CGT is due (non‑residents must report within 60 days in all cases).
• Spouses and civil partners can normally transfer assets without immediate CGT; couples have only one main residence for PPR.
• Gifts, non-resident disposals, trustees’ and personal representatives’ disposals, and mixed-use properties raise special CGT issues for property clients.
• Companies are liable to Corporation Tax, not CGT, on property gains.

Key Terms and Concepts

• chargeable gain
• chargeable asset
• disposal
• principal private residence relief
• annual exempt amount