Learning Outcomes
After reading this article, you will be able to explain when Capital Gains Tax (CGT) arises in property transactions, identify what counts as a chargeable gain, understand the main exemptions and reliefs (notably the principal private residence relief), and apply key calculation and reporting requirements. You will also be equipped to answer SQE2-style questions involving property disposals and CGT.
SQE2 Syllabus
For SQE2, you are required to understand the major elements of how Capital Gains Tax applies to property transactions. In your revision, focus on:
- 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.
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.
- Who is liable for Capital Gains Tax when a UK resident individual sells an investment property in England?
- What main exemption may apply to reduce or remove a CGT charge on the sale of a person's only or main home?
- If a property is jointly owned, how are any capital gains treated for CGT?
- 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.
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.
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. Additional rules provide extended periods for people who are disabled or have moved into care.
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.
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 there was no letting for longer periods, no CGT is payable due to full PPR relief.
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).
Once the gain exceeds the exempt amount, the part of the gain falling within basic rate income tax is taxed at 18% for residential property (10% for non-residential), with higher rates of 28% (residential) or 20% (non-residential) above that.
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.
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 (improvements), less £5,000 (sale costs) = £85,000. The available annual exempt amount is deducted before CGT is assessed.
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, special reporting and payment rules exist, usually requiring a report and payment within 60 days, regardless of gain.
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 are usually exempt from CGT at the time of transfer.
- CGT may apply to gifts made to individuals or to trusts. Market value is used.
- 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), separate calculations apply for the exempt and non-exempt portions.
- Companies selling property pay Corporation Tax on gains, not CGT.
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.
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.
- Each individual has an annual exempt amount for CGT.
- Residential disposals must be reported and paid within 60 days of completion.
- Spouses and civil partners can normally transfer assets without immediate CGT.
- Gifts, non-resident 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