How long do you have to live in a property to avoid capital gains tax the UK?

  • today 08 Jun 2022
  • timer 4 minutes read
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Capital gains tax (CGT) in the UK is applicable when you sell a property and makes a profit. However,  it is not related to primary homes but applies to second homes and buy-to-let properties.

There are opportunities for such individuals to reduce the amount of CGT under certain conditions.

The number of years you live in a property affects the  CGT amount for residential properties. We can say that the longer you live in a property, the more CGT relief you receive.

Here is a handy guide for property sellers to understand how long you have to live in a property to avoid capital gains tax UK. We'll cover the following areas:

What is capital gains tax?

The CGT is a tax applicable on the profits you make after selling a property in the UK. Generally,  CGT implies selling a buy-to-let property or your second home. Individuals need to pay partial CGT if they use a part of the home as a business premise.

The basic rate of CGT is 18% on profits. At the same time, the higher and additional CGT rate is 28%. Every capital gain adds to your income sources and falls under the income tax bracket for the financial year.

Capital gains tax rates

Credit: The Times

The tax-free capital gains for 2022-23 is £12,300. Any income above this level charges CGT on individuals. A couple can jointly make a tax-free capital gain of £24,600.

How long do you have to live in a property to avoid CGT?

You must be a resident of the property for the entire period of ownership to avoid CGT. No Capital Gain Tax is applicable on your residential property if you live there as your primary and only residence. It is known as the Private Residence Relief (PRR).

You must reside in the property for atleast one year to make it your permanent residence. You can move to a different place for specific reasons. According to the HMRC, you qualify for PRR,

  • For the period you are living in the property, and
  • The last nine months of your ownership period if you don't live there anymore.
You own a property of 10 years

You own a property for 10 years.

Can we extend PRR?

You can move back into the home to extend PRR under certain conditions:

  • You didn't occupy your new home for 12 months as you can't sell the old property.
  • You have been waiting in the old property for 12 months due to the refurbishment of the new residence.
  • You may be absent for 36 months for some reason and move back immediately after the period.
  • You are working at a different place far from your home, the PRR considers 48 months of absence, but you must return after that period.
  • If you work in an overseas company, PRR considers an unlimited absence. You need to return unless you permanently settle there and sell the old property.

Does PRR apply to commercial property?

No, this relief is not applicable for commercial properties. If you have a residential property, or more than one, you are eligible for PRR.

If you're using the whole or part of your dwelling to make a profit or use it exclusively for business, no relief is applicable on the capital gain tax.

Who is eligible for the Private Residence Relief?

Individuals can qualify for PRR if they profit from selling their only primary residence.

You are also eligible for the relief if,

  • If you own the freehold of your home
  • You are a tenant having leasehold
  • You jointly own a freehold or lease with someone else

How to calculate the relief amount?

The relief amount depends on the number of years you stay in the property.

Let us take an example,

  • You buy a residential property for £200,000 and sell it for £300,000 after ten years (120 months). You make a taxable gain of £100,000 on the sale.
  • You lived in the property for the first three years and then let it out.
  • The PPR is applicable for these three years and the last nine months of your stay there.
  • You'll get PPR for 45 months (36 months + 9 months) which is 37.5% (45 months divided by the 120 months) of the total time. So, the relief amount is 37.5% of the profit, i.e., £37,500.
  • The remaining 62.5% of the gain of £62,500 is the chargeable CGT as PPR doesn't cover this part of your profit.

If you have sold the property between 6th April 2014 and 6th April 2020, you got PRR for the last 18 months of your stay in the residential property. However, from 6th April 2021, you will receive PRR for the last nine months of ownership.

How to claim the PPR?

1.   You have used a part of your property as a home

If you share a part of your property with tenants, you can claim relief for your dwelling section.

For example, you lent a room of your house that comprises 10% of the total property.

Now, you want to sell the property and reduce CGT. You can claim relief for only the remaining 90% of your dwelling property, and 10% is chargeable.

2.   You have lived for a few years

You can claim PR only for the time you have lived on the property. Under certain circumstances, HMRC can consider your absence in the residential property.

3.   Your property is development value

PPR is applicable only on the actual value of your property, excluding its development value. Here, you have to calculate the partial PPR by deducting a part of your expense from the current use value of the property.

After calculating your Capital Gain Tax and the PRR, report it to the HMRC before 31st January every year.

Wrapping up

Capital Gains Tax is one of the several taxes paid by an individual for a property to the HMRC. Some of them are council tax, income tax on the rent for rental property, and inheritance tax for property gifts.

Taxes may become difficult for people to understand due to their complexity. They can consult with tax advisors to better understand CGT and other similar taxes.

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About author

Sophia

Sophia is a full-time financial writer at experlu. she is a passionate blogger and love to share her knowledge on various subject. Content created by Experlu– are loved, shared & can be found all over the internet on high authority platforms.