Homes under the CGT hammer

11 June 2024

For the vast majority of individuals, any capital gain arising on the sale of their main home will be exempt from capital gains tax (CGT), due to Private Residence Relief (PRR), also commonly referred to as Principal Private Residence Relief (PPR). 

Whilst large numbers of individuals rely on this relief when selling their home, it is far from well understood. This is despite it being one of the most valuable tax reliefs in the UK, with the latest statistics estimating that it cost the Treasury around £31.5bn in the 2023/24 tax year. The lack of understanding is largely due to the rules being difficult to follow, but in broad terms the relief will typically apply in full when:

  • the property sold has been your only or main residence during the whole period of your ownership
  • you have not been absent from the property, other than for the last nine months of ownership and certain other specifically allowed absences
  • no part of the home has been used exclusively for business purposes
  • the garden or grounds do not exceed half a hectare, or are required for the reasonable enjoyment of the property as a home.

There are various instances in which an individual can potentially end up with a taxable chargeable gain arising on the sale of their main home. For example, this might happen when two individuals each own a property and then move into one of them, to live together, or if lengthy renovation works were undertaken before an individual moved into a new home.

When a CGT liability arises on the sale of a residential property, it’s usually necessary to separately report this on a CGT return and pay any associated tax within 60 days of completion. In data released to RSM UK following a freedom of information request, HMRC has confirmed that 51,800 CGT returns in the 2021/22 tax year included claims for PPR relief.

In the past, even those taxpayers who could not benefit from PPR in respect of a full gain could have potentially relied on the CGT annual exemption to cover an unexpected taxable chargeable gain. However, the CGT annual exemption was cut from £12,300 in the 2022/23 tax year to £6,000 in the 2023/24 tax year, and now stands at £3,000.

There is now limited room for error and the safety net of the CGT annual exemption has been largely pulled away. We could therefore see the number of disposals of homes on which CGT is due increase substantially. At the moment, such tax is due at a rate of either 18% or 24% depending on whether the seller is a basic or higher rate taxpayer respectively.

With reports of lobbying for CGT rates to be increased, and such proposals now being included in the manifesto pledges of some political parties, some homeowners could find themselves with a surprisingly high tax bill when they come to move home. For others it could be even worse if they don’t even realise they have a bill to pay, and end up incurring HMRC penalties and interest as well.