How long do you have to keep a property to avoid capital gains tax
When it comes to Capital Gains Tax (CGT), we all want to pay as little as possible. No one wants to pay more tax. There are many ways UK residents are be eligible to pay CGT, and disposing of a property is one of the most common.
There are ways you minimise or avoid capital gains tax when selling a house, and tax advisers are on hand to offer guidance. Read on if you want to know how long you have to keep the property to avoid capital gains tax and other ways to reduce the CGT you pay.
What is Capital Gains Tax (CGT)?
CGT is a tax payable on the increase in value of an asset when it is disposed of by sale or gift. There is no CGT to pay on a person’s primary residence, only or main residence. This is known as the Principal Private Residence exemption (PPR).
However, CGT is payable on a second home and other assets, which varies depending on whether you are a basic or higher rate taxpayer, with the tax rates being 18% and 28%, respectively. A UK resident has a CGT allowance, an important issue in determining when and how you pay capital gains tax. In recent news it's said that council tax could double for second homes in East Devon, this could be picked up by other counties.
What is Principal Private Residence (PPR)?
Private residence relief applies to the sale of property that is or has been the seller's principal residence. Typically, a dwelling house is where a person lives and is their only or main residence, but it can include adjoining buildings, grounds and gardens. There is something called the “36 month rule” that has been changed over the years that's worth taking a look at.
If any part of the building or surrounding grounds are used for business, the related gain isn’t eligible for relief.
The length of residence is essential to HMRC, but they also consider the “quality” of residence. While you can claim private residence relief with occasional or short residences, HMRC tends to look more favourably on more extended residences.
How can you show you were resident?
A typical way to indicate you resided in a property is to offer utility bills, an income tax statement and bank statements for the same home address. If you can point to a continuous period, this is of great value in making your private residence relief claim. People who own more than a single property and are looking to enjoy a tax-free allowance face challenges, but you can communicate your main residence to HMRC.
How long must I own a property to claim private residence relief?
HMRC have concerns about property developers and individuals flipping residential property. This means purchasing a UK property, perhaps a fixer-upper, improving the property and its value, and then selling for a profit.
There have been many cases in the UK of HMRC taking individuals and developers to court to prove that the property wasn’t the main residence. For example, the 2011 case of Benford v HMRC that saw Mr Benford claim his property sale in six months was down to his marriage breaking down. The property sold at £50,000 profit. HMRC obtained electrical bills and council tax documentation to prove Mr Benford didn’t reside in the property.
There is no minimum stay associated with private residence relief
So, while there is no minimum period recommended to prove you genuinely reside in a property, staying as long as possible is helpful. There are reasons why people need to sell property quickly, but if this is the case, there will likely be documentation.
If a marriage breakdown is the case, there will be divorce papers to support a claim. The same is true with any family changes or issues with civil partners. If a job offer changes a family’s plans, a paper trail will back this claim.
Tax rules are flexible to allow for unexpected moves
Sometimes, people live in a property for a short time and must move on. When this arises naturally, HMRC shouldn’t punish these people. However, it is a loophole some individuals, landlords and developers try to exploit to avoid CGT payments.
Rental income appeals to landlords in the buy to let market
The same issues apply with buy to let properties. Demand for rental property means the buy to let market has been busy in recent times, generating significant rental income, but some landlords have struggled with the market. With property increases encouraging some landlords to sell buy to let properties, paying CGT has been a big issue in the rental market.
Quoted from Auditox Accountants in Darlington “it is natural to look to avoid capital gains tax on property when you sell, especially if you sell more than one property. Even though each individual has a personal allowance for tax and a CGT allowance, this might not last long if someone sells a house or two in the same tax year”.
Everyone wants to find tax relief
There is also a difference in CGT payments for basic rate taxpayers and a higher rate taxpayer, which can add up to a significant sum, depending on market value at the time of buying a house and selling property. Of course, even the sums involved with paying capital gains tax for a basic rate taxpayer can be high. A tax liability can add up quickly, so any tax relief for a basic rate taxpayer is welcome.
Work with experts like an estate agent, accountant or tax specialist
Much as a landlord would work with estate agents when buying investment property, it is essential they liaise with tax specialists to manage their capital gains taxes, any applicable relief, tax liability and overall tax responsibilities.
No one wants to pay capital gains tax, but if you cannot completely avoid capital gains tax, you need to pay, on time, and in full.
Do you have to pay capital gains tax?
In an ideal world you can avoid CGT completely, but this isn't always possible. Reducing your CGT liability to the UK government is always a great outcome, and help is available. For support in managing your CGT bill, your capital gains tax allowance and all issues of taxable income, seek advice from a tax specialist who will fully advise you on ways to lower your tax bill legally.
