Minimise CGT on a Property Disposal with this Exemption

We all know that when we sell our house it is exempt from capital gains tax (CGT) if it is our principal private residence. If we can’t claim it as such, then any gain we make on its disposal will be subject to CGT. Here, we discuss an exemption that few people might know about.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2020/21.

There are plenty of periods of absence that can be ignored when working out how long someone has lived in a property (if they have).  A lot of the periods of absence need to be preceded and followed by residence, for example, periods totaling up to 3 years if both preceded and followed by residence (as long as no other residence was exempt at the same time).

The last 9 months of ownership are also exempt as long as it was the main residence at some time (although 36 months still applies for disabled persons and those resident in long-term care homes).

Another exemption that few people might know about is the letting exemption.  This was particularly useful prior to April 2020 when it was a useful exemption for those who rented a property that had formerly been their own home, for example, couples that got together ‘later on in life’ may have had a property each and decided for financial reasons (or cynical ones!) to hold onto both; living in one and renting the other.  In these circumstances, letting relief would have been useful if either property was ever sold.

It was a generous relief and so perhaps not surprisingly the generosity of the scheme was reduced, and for disposals since April 2020, letting relief has only been available where the owner is sharing occupancy of the home with the tenant, in other words, there is no exemption where the whole property is let out.

If letting relief is still possible, then the amount is the lower of (a) £40,000 (b) the amount of Private Residence Relief available, and (c) the amount of the chargeable gain made whilst letting out part of the home.

Letting Relief Example

Phil let 60% of his house and lived in the other 40%.  He made a gain of £60,000 when he sold the property.  Phil is entitled to Private Residence Relief for 40% of the gain which is £24,000.

The remaining gain is £36,000 as a result of the letting.

The lower of these figures and £40,000 is £24,000 so Phil is entitled to letting relief of £24,000.  His chargeable gain will therefore be £12,000 (£60,000 gain less £24,000 Private Residence Relief less £24,000 letting relief).  If he has an unused annual exempt amount of £12,300 Phil will not have any CGT to pay.

For those not as lucky as Phil, remember that for sales of UK residential property since 6 April 2020, CGT must be reported and paid no later than 30 days after the property’s completion date.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you’re wanting to feel more confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R03 taster calculation workbook now!

Alternatively, you can download a taster resource for R06, AF1, AF4, or AF5 if one of those exams is your study challenge.