Small business and tax blog

A common question is:

“I own a house, which I lived in until I got married 2 years ago. Since then the house has been let out, and I now want to sell it. It has gone up in value since I bought it. Will I have to pay any capital gains tax?”

Providing that:

• The primary purpose of buying the property was not to sell it early to make a profit;
• There was no subsequent expenditure on the property wholly or partly for the purpose of selling it at a profit;
• The property has at some point been the owner’s main residence;
• No part of the property has been used exclusively for business purposes;
• The whole property comprises one single residence; and
• On a property acquired after 10 December 2003, the acquisition cost was not reduced by gift holdover relief (unlikely in most cases).

Then there will be no capital gains tax to pay on the sale of the property if it is sold within 36 months of its owner moving out. This applies regardless of what the house was used for during the owner’s absence, and regardless of whether any election is made to make the new house the principal private residence.

Capital gains tax payable after 36 months

After 36 months, the situation becomes more complicated. A taxable gain may start to build up, but the whole gain does not suddenly become chargeable in month 37. To start with, the gain may be covered by the annual tax exemption or residential lettings relief, but as the months or years go by, it becomes more likely that capital gains tax will be payable on the sale.

To qualify as the owner’s main residence, it needs to be lived in as the main home for a period of time. There are no time limits set out in law, and it all depends on individual circumstances, but 3 months of living in a property is probably too short to qualify.

Contrary to what many people believe, the amount of any mortgage on a property makes no difference to capital gains tax, even if it is a buy-to-let mortgage.

This tax relief is given by paragraphs (1) and (2) of Section 223 of the Taxation of Chargeable Gains Act 1992. Providing all the conditions are met, and property prices are rising, it can be a good way of making a tax-free gain.

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