Sarah Bradford examines the impact of the reduction in the higher rate of capital gains tax on residential property gains and the rules for reporting the gain and paying the tax.
For capital gains tax (CGT) purposes, all gains are not equal. Higher rates of tax apply where the gain relates to residential property. There are also stricter reporting and payment deadlines.
For both 2023/24 and 2024/25, capital gains other than those relating to residential property (or carried interest) are taxed at 10% where income and gains fall within the basic rate band (set at £37,700 for both 2023/24 and 2024/25) and at 20% where income and gains exceed the basic rate band. However, where the gain relates to the disposal of residential property, the gain is taxed at 18% where gains do not exceed the basic rate band. For 2023/24, the rate of tax is 28% where income and gains exceed the basic rate band. This tax rate is cut to 24% for 2024/25.
Main residence exemption
The availability of the main residence exemption (also known as principal private residence relief or private residence relief) means that most taxpayers who sell their home will not have to pay CGT on any gain they make. The exemption applies where the property has been the individual’s only or main residence throughout the whole period for which the individual has owned it. Certain periods of absence are ignored in determining whether this test is met.
If the taxpayer has more than one home, they can choose which property is their main residence for CGT purposes. However, a property can only qualify as a ‘main residence’ for tax purposes if it is lived in as a home. Spouses and civil partners only have one main residence between them. An election to designate a property as a ‘main residence’ must be made within two years of a change in the mix of properties (e.g., where a second home is acquired within two years of the date of acquisition of that property).
Where an election is not made, the question of which property is the ‘main’ residence is determined by reference to the facts.
Chargeable residential property gains
A CGT liability may arise where a gain is made on the disposal of a property which is not occupied as the only or main residence through the whole period for which the taxpayer has owned it.
Where it has been the only or main residence for part of that period, the gain is apportioned such that main residence relief is available for the period for which it is occupied as such and also the final nine months (or 36 months where the taxpayer goes into care). The balance of the gain is liable to CGT.
A gain may also arise on a property which has never been lived in as a main residence. This may be because the property has been let out as a residential letting or as a holiday letting, or where it has been used as a holiday home by the taxpayer. Any resulting gain may be liable to CGT if not sheltered by the annual exempt amount or by allowable losses.
Transfers between spouses and civil partners are made on a no gain, no loss basis. Consequently, if an investment property is transferred from one spouse or civil partner to the other, there will be no CGT to pay on the transfer. However, a chargeable gain may arise where the recipient sells or otherwise disposes of the property to a third party.
Furnished holiday lettings
Currently, furnished holiday lettings (FHLs) benefit from a number of CGT advantages compared to residential lettings. If the associated conditions are met, the gain may be capable of benefiting from rollover relief or gift holdover relief. Where the gain is not rolled over and business asset disposal relief is available, the gain is taxed at the preferential rate of 10% (even if income and gains exceed the basic rate limit) to the extent that the gains fall within the available lifetime limit of £1m.
The FHLs rules are to be abolished from 6 April 2025. From that date, FHLs will be treated in the same way as residential lettings. The favourable CGT rules will no longer apply. Where a disposal is on the cards, consideration could be given to making the disposal prior to 6 April 2025 to benefit from the existing rules, particularly if the property has been owned for some time and is pregnant with gain. Tax at 10% on a gain of £500,000 is £50,000, whereas tax at 24% on a gain of £500,000 is £120,000.
Care should be taken not to fall foul of anti-avoidance provisions. At the time of the spring 2024 Budget, it was announced that anti-forestalling provisions would apply to unconditional contracts made on or after 6 March 2024. The eventual legislation may well contain more anti-avoidance provisions.
Reporting residential property gains
Where a chargeable gain is made on the disposal of a UK residential property, the gain must be reported to HMRC within 60 days of the completion date.
If the property is jointly owned, each co-owner is responsible for reporting their share of the gain and paying the tax they owe.
A taxpayer will need to use a ‘Capital Gains Tax on UK Property’ account to report the gain to HMRC online. They can access their account or set one up by signing in to their Government Gateway account. If they are unable to report online, they can download a paper form (see www.gov.uk/government/publications/report-capital-gains-tax-on-uk-property). A paper form can also be obtained from HMRC. The paper form rather than the online service must be used if the taxpayer has already submitted their tax return for the tax year in which the disposal occurred.
When reporting the gain, the following details must be provided:
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the address and postcode of the property;
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the date that you acquired it;
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the date you exchanged contracts for the disposal;
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the completion date of the disposal;
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the sale consideration (or market value at disposal, where appropriate);
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the purchase price (or market value at acquisition, where appropriate);
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the cost of any improvements;
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the buying and selling costs; and
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any tax reliefs that apply (for example, main residence relief or lettings relief).
Non-UK residents must report all sales of UK property or land, even if there is no tax to pay.
Paying CGT on residential property gains
Where a chargeable gain is made on the disposal of a residential property, the best estimate of the CGT due on that gain must be paid over to HMRC within 60 days of the completion date. For other gains, the CGT is payable by 31 January after the end of the tax year in which the disposal occurred. Thus, the payment window is considerably shorter for residential gains, particularly where the disposal occurs early in the tax year.
For example, if a residential property sale completes on 1 May 2024, the tax on the gain must be paid by 30 June 2024. However, if a taxpayer sells some shares on 1 May 2024, they do not need to pay the corresponding CGT until 31 January 2026.
When calculating the best estimate of the CGT that is due on the disposal, the annual exempt amount (set at £3,000 for 2024/25) can be set against the gain where it has not already been used. Any losses realised prior to the disposal can also be set against the gain, as can those brought forward from earlier years. Remember to use the correct rates of tax – for 2024/25, the rates are 18% where income and gains fall within the basic rate band of £37,700, and 24% once they exceed this.
Once the taxpayer has reported the residential property gain to HMRC, they will be sent a letter containing a payment reference that starts with an ‘X’. This should be used when paying the tax, which can be paid through the online tax payment service, via online banking or by cheque.
When the taxpayer files their tax return for the year in which the property was sold, they will need to calculate their CGT liability for the year as a whole, taking account of all disposals in the tax year. If other gains have been made, the taxpayer may have further tax to CGT to pay. Alternatively, they may be due a refund if losses have been realised since paying the tax on the residential property gain.
Practical tip
Make sure that you follow the special rules for reporting residential property gains and paying the associated tax and that when calculating the gain, you use the reduced higher residential rate of 24%, applying from 6 April 2024.
