Reduce Property Gains Tax, Property Developers, Property Investors

How long do I need to live in a house to avoid Capital Gains Tax UK

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Simon Misiewicz

14th July 2021

How long do I need to live in a house to avoid Capital Gains Tax UK

The relief you get usually depends on the amount of time you’ve lived there for.  This is also true for the financial gain you make from selling your property.  Below are the F.A.Q.’s on this subject and the details to answer How long do I need to live in a house to avoid Capital Gains Tax UK?

The frequently asked questions about Capital Gains Tax

As property accountants, we are regularly asked about Capital Gains Tax in the UK. We will look to answer the below questions in this Article.

“Are you paying too much Capital Gains Tax?”

“How much Capital Gains Tax is paid in the UK?”

“What are the basics of Capital Gains Tax?”

“What is Private Residence Relief (PRR)?”

“How do I claim PRR to avoid CGT?”

“When does CGT have to be paid in the UK?”

“How can I reduce my Capital Gains Tax bill?”

“How does this affect our American readers?”

Are you paying too much Capital Gains Tax?

Our property tax specialists help over 1,000 monthly retained UK landlords and property investors to minimise tax whilst building their wealth.

There are many reasons why people pay far more Capital Gains Tax than they need to.

This is because:

– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available to them.
– Their accountants or solicitors are unaware of the many reliefs available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant/ tax specialist have not been made aware.

How much Capital Gains Tax is paid in the UK?

According to industry statistics, in 2020-21 receipts from Capital Gains Tax payments in the UK amounted to £10.60 billion.

This represented an increase of £800 million paid in CGT compared to the previous year.

Recent legislation and tax law changes have caught many property investors. At Optimise Accountants, we specialise in reducing our clients’ tax liability to make their investments deliver a better ROI.

Can you afford not to minimise your Capital Gains Tax bill this year?

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What are the basics of Capital Gains Tax?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that Capital Gains Tax is a significant concern to many property investors in the UK.

Although CGT cannot be avoided, it can be minimised with the help of professional property tax accountancy advice.

It would be best if you looked to make a property your permanent residence for at least 12 months to claim tax relief and avoid paying Capital Gains Tax in the UK.

When you sell a second home that has increased in value from your point of purchase, you have made a ‘gain’, which the HMRC classifies as taxable. This is the essence of Capital Gains Tax.

Some factors mean you might get some relief from CGT payments, including:

– If the property was your main residence
– If you let part or all of the property
– If you used the property for business
– The grounds cover less than 5,000 sq metres

The money you used to purchase the asset was already subject to taxation, which is why the HMRC only taxes the difference after the sale.

Disposing of an asset is defined by the HMRC as:

– Giving the gift away as a gift
– Selling it
– Transferring it to another party
– Receiving compensation
– Trading or swapping for another item

The Government requires that you only pay CGT if your gains throughout the year exceed the Annual Exempt Amount (AEA).

The tax-free allowance is £12,300 for individuals. Keeping your profits below this threshold is a straightforward way to avoid paying Capital Gains Tax on property.

It is also important to point out that you do not pay tax for the period you have lived in the property.

You may have purchased a home to live in but move into a new home and rent out the original house. This results in a potential CGT liability. You do not pay CGT on a property that is your main residence.

HMRC states that there are periods where you are absent from a property where you will qualify for Private Residence Relief. These include:

– The period you lived in the property as your main and only residence
– The final nine months of your period of ownership always qualify for relief (even if you didn’t live there)
– 12 months you do not occupy your new home when you acquire it because you are not able to sell the old home
– 12 months you do not occupy your new home because you are waiting for the completion of refurbishment on the new property

To find out everything you need to know about HMRC and Capital Gains Tax, review their information.

We have produced a useful presentation on our YouTube channel covering the basics of Capital Gains Tax which is worth watching.

If you’re unsure of your tax position regarding CGT, speak to one of our property accountants today.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

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What is Private Residence Relief (PRR)? 

Private Residence Relief (PRR) is a Capital Gains Tax relief applied when you sell a property.

To benefit from PRR, the property must be your main home.

If you’re selling a second home or buy to let property, you’ll have to pay CGT on property profits, but you might get some relief depending on whether you have ever lived in the property.

You would not get any CGT relief if you bought the property to make a ‘gain’, i.e. as an investment or for business use.

The relief you get as a landlord depends on the financial gain you make from selling your property and the amount of time you’ve lived there for.

The relief can be very straightforward if you own one home at a time and have the required evidence to show that you meet all the qualifying conditions.

A claim for PRR can be complicated if you own multiple properties or are developing properties.

To claim PRR, you must own the freehold or leasehold of the property, which must have been occupied as a dwelling or occupied as your only or main residence.

The relief does not apply to commercial property.

PRR covers the building and a permitted area of up to 1.25 acres of garden and grounds, including outbuildings.

If you own two or more homes, you will need to make an election to the HMRC if you have two homes that qualify for PRR to say which home is your main private residence.

It is possible to ‘flip’ homes to avoid CGT by making elections at strategic times, but this needs to be carefully considered.

We recommend that you review the guidance provided by HMRC on taxes when selling a home.

To reduce the CGT liability you might owe, speak to one of our property tax accountants.

How do I claim PRR to avoid CGT?

You normally qualify for PRR when you sell your only or main home and part of the garden or grounds.

You do not qualify for PRR if:

– You bought the property intending to sell it for a profit
– Any part of the home or grounds are used for business
– Your plot size exceeds half a hectare
– Your grounds are farmland

Private Residence Relief claims (or the lack of them) are regularly investigated by the HMRC.

The rules for tax relief may become complicated if you are:

– Frequently buying and selling properties
– Developing properties for a profit
– Purchased an uninhabitable residence
– Inhabited the property for a short time
– Have let or sub-let your home
– Used all or part of your home as a business
– Jointly own the property
– Move into a care home

You need to review the conditions for the relief and if any part of your gain on disposal is not covered by the relief, notify HMRC of your charge-ability to tax. You will then need to complete a tax return.

If you own two or more properties and fail to make an election to nominate one property as the main residence, the HMRC may decide for you.

A property must be a residence to make a residence election.

If you own or occupy a single property, no election is possible.

The onus is on you to prove that you have met the qualifying conditions to make a relief claim.

Please read our article to learn more about using the Private Residence Relief to reduce Capital Gains Tax?

When does CGT have to be paid in the UK? 

Once you have calculated any relief you’re eligible for, you need to report any Capital Gains Tax to HMRC by 31 January each year.

You’re required to pay CGT on any property that is not your main home.

If the house is large and used for business or has been let out, avoiding CGT will be challenging.

Additionally, the CGT rates on the property are higher than the asset rates.

A basic rate taxpayer will need to pay a 10% CGT rate on all assets. The same individual would need to pay a CGT rate of 18% on all property.

There is also a higher additional payer rate for both categories. The additional ratepayer will need to give a CGT of 20% on all assets. The higher ratepayer will need to pay 28% CGT on a property.

To reduce your CGT bill, speak to one of our tax team today.

How can I reduce my Capital Gains Tax bill?

Everyone has an annual CGT exemption. This currently stands at £12,300 and is frozen at this level until 06 April 2026.

Gains above the annual exemption are charged depending on your other income.

To reduce your potential CGT bill, utilise the following:

Use the allowance – the £12,300 is a ‘use it or lose it’ allowance, so it cannot be carried forward to future tax years. A married couple can potentially realise gains of £24,600 without incurring any tax liability.

Offset any losses against gains – by doing this in the same tax year; it is possible to reduce your CGT bill.

Consider an all-in-one fund – investors in multi-asset funds don’t have to pay CGT on any gains made when the fund itself sells holdings because this is the fund trading rather than you.

You may have to pay CGT on any gains made when you sell your shares in the fund after the annual allowance.

To find out more about how to reduce your CGT bill, contact one of our property tax accountants.

Manage taxable income levels – since the rate of CGT you pay is dependent on your income tax band, reducing your income tax rate can have a beneficial impact on your CGT.

You can reduce your taxable income through pension contributions or charitable donations.

Don’t pay twice – CGT is wiped out on death, so your estate will pay Inheritance Tax rather than CGT. Incurring CGT by selling assets later in life can effectively mean paying tax on the same asset twice.

Use your annual ISA allowance – the current allowance is £20,000, and all personal gains are tax-free on ISA investments.

Diligent investors with ISA portfolios of £500,000 and higher can remove all CGT concerns with careful tax planning and make the best use of available reliefs and allowances.

Please speak to one of our specialist tax accountants today to find out how to reduce your Capital Gains Tax bill.

How does this affect our American readers?

How long do I need to live in a house to avoid Capital Gains Tax UK or the US?

If you sell a home in the UK and move to the US, you may still need to pay the IRS capital gains tax.

This is because the IRS only provide a $250,000 tax relief on home disposals for single people. This is doubled to $500,000 for married couples.

To learn more, click here to help British people save Tax in the US and Americans save Tax in the UK.

It is one thing to be tax-efficient in the UK or the US; it’s another to be also tax-efficient across the Atlantic.

This is why you need to get a tax advisor that truly understands international tax.

How long do I need to live in a house to avoid Capital Gains Tax UK

CGT: You may be interested in our main Article on Capital Gains Tax rates and allowances. You may also be interested in knowing more about our services to help reduce your Capital Gains tax liability when you sell a buy to let property investment.

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