Taxation in property transactions - Capital Gains Tax implic...

Learning Outcomes

This article outlines the Capital Gains Tax (CGT) implications of property transactions—when gains arise, what constitutes a chargeable gain, key reliefs (including principal private residence relief and letting relief), calculations for straightforward and mixed‑use scenarios, and reporting obligations relevant to SQE1, including:

• Arm’s‑length disposals and market value substitution for non‑arm’s‑length transactions
• Allowable costs, enhancement expenditure, and apportionment in part disposals (for example, sale of part of a garden)
• Eligibility and quantification of principal private residence relief, including deemed occupation and restrictions for exclusive business use
• Availability of letting relief post‑April 2020 for shared occupation
• Annual exempt amount (AEA), capital loss offset, and CGT rates for residential versus non‑residential gains
• Transfers between spouses/civil partners, gifts, and the effect of death, including base cost consequences for beneficiaries and personal representatives
• CGT issues on mixed‑use and business property, including relevance of business asset disposal relief
• 60‑day UK residential property reporting and payment rules and alignment with final self‑assessment reconciliation

SQE1 Syllabus

For SQE1, you are required to understand the Capital Gains Tax implications of property transactions, including when CGT is triggered, how gains are calculated, and the operation of key reliefs, with a focus on the following syllabus points:

• the definition of a chargeable gain and the calculation of CGT on property disposals
• the main exemptions and reliefs, especially principal private residence relief and letting relief
• the treatment of mixed-use and business property
• the CGT position for transfers between spouses/civil partners and on death
• reporting and payment deadlines for CGT on property disposals
• the market value rule for non‑arm’s‑length transactions and gifts
• the annual exempt amount, loss offset, and rates applicable to residential gains
• CGT for UK‑resident and non‑resident persons disposing of UK land
• part disposals of gardens/grounds and apportionment by area or value

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is a chargeable gain for CGT purposes in a property transaction?
2. Which relief may exempt a homeowner from CGT when selling their main residence?
3. How is CGT calculated when a property has been used partly as a home and partly as a business?
4. What is the reporting deadline for CGT on the sale of a UK residential property?

Introduction

Capital Gains Tax (CGT) is a tax on the profit made when a chargeable asset, such as land or buildings, is disposed of. For property transactions, CGT can arise for individuals, trustees, and personal representatives. Understanding when CGT applies, how to calculate the gain, and the main reliefs is essential for advising clients and for SQE1.

CGT liability depends on the nature of the property, how it has been used, and the taxpayer’s circumstances. Most owner‑occupied homes are fully exempt under principal private residence relief (PPR), but second homes, investment properties, and some mixed‑use properties can give rise to CGT. UK residents are generally taxed on worldwide gains, and non‑UK residents are chargeable on disposals of UK land. Residential property gains are taxed at rates different from general capital gains, and special reporting rules require UK residential property gains to be notified and paid within 60 days of completion. Reliefs, allowances, and precise computations determine the final liability.

Key Term: chargeable gain
The profit made on the disposal of a chargeable asset, calculated as disposal proceeds minus acquisition cost and allowable costs.

Key Term: disposal
Any event where ownership of an asset is transferred, including sales, gifts, exchanges, or the grant of certain rights (such as leases at a premium).

Key Term: chargeable asset
An asset subject to CGT on disposal, including freehold and leasehold property, but excluding exempt assets such as cars and certain chattels.

Chargeable Gains and Disposals

CGT is charged on the gain made when a chargeable asset is disposed of. The gain is the difference between the disposal proceeds and the acquisition cost, after deducting allowable costs and applying any available reliefs.

Disposals include sales for consideration, gifts, and transfers otherwise than at market terms. The grant of certain rights can be a disposal (for example, granting a lease for a premium). Part disposals—such as selling part of a garden—generate gains computed by apportioning base cost and enhancement expenditure reasonably to the part sold. Where land is acquired before statutory rebasing dates, the base cost may be substituted in accordance with general rules (details are usually provided in exam materials).

Where transactions are not at arm’s length (for instance, gifts or sales to connected persons), the market value rule applies to compute proceeds or acquisition cost. This is particularly relevant in family transfers of property and below‑market sales.

Key Term: market value rule
Where the transaction is not at arm’s length (including gifts and disposals to connected persons), market value is substituted for the actual price to compute the gain.

Calculating the Gain

The basic formula for CGT is:

Chargeable Gain = Disposal Proceeds – (Acquisition Cost + Allowable Costs + Enhancement Expenditure)

• Disposal Proceeds: The amount received for the property, or market value if not sold at arm’s length.
• Acquisition Cost: The original purchase price, plus incidental costs (e.g. legal fees, SDLT).
• Allowable Costs: Costs wholly and exclusively incurred in buying, improving, or selling the property (e.g. estate agent fees, advertising, valuation).
• Enhancement Expenditure: Capital costs spent on improving the property (not routine repairs).

The annual exempt amount (AEA) is deducted from total gains in the tax year. Only gains above the AEA are chargeable. The AEA is set by statute and changes over time; for 2024/25, the AEA for individuals is £3,000. Capital losses are first set‑off against gains of the year; unused losses carry forward to offset future chargeable gains efficiently.

Key Term: allowable costs
Expenditure incurred wholly and exclusively in acquiring, improving, or disposing of a property, which can be deducted when calculating the chargeable gain.

Key Term: annual exempt amount (AEA)
A tax‑free allowance deducted from net gains in the tax year; only gains above the AEA are chargeable.

Apportionment is required where only part of the property is sold or where a property is mixed‑use. In part disposals (such as sale of part of the grounds), a reasonable apportionment of base cost by area or value is used to compute the gain on the part sold. In mixed‑use, it may be necessary to apportion both the proceeds and costs by reference to floor area or other defensible basis.

CGT rates depend on the asset type and the taxpayer’s income position in the year. General gains are taxed at 10% within any remaining basic rate band and 20% at higher rates; gains on UK residential property are taxed at 18% within any remaining basic rate band and 24% otherwise (rates current from 6 April 2024). Trustees and personal representatives face specific rates on gains (including higher rates for residential property).

Worked Example 1.1

Question:
Amira bought a flat for £200,000, paying £5,000 in legal fees and £2,000 in SDLT. She sells it for £350,000, incurring £3,000 in estate agent fees. What is her chargeable gain (ignoring reliefs and the annual exempt amount)?

Answer:
Acquisition cost: £200,000 + £5,000 + £2,000 = £207,000
Disposal proceeds: £350,000 – £3,000 = £347,000
Chargeable gain: £347,000 – £207,000 = £140,000

Main CGT Reliefs in Property Transactions

Certain reliefs can reduce or eliminate CGT on property disposals. The most important for SQE1 are principal private residence relief and letting relief.

Principal Private Residence Relief (PPR)

PPR relief exempts the gain on the sale of a property that has been the individual’s only or main residence throughout ownership, subject to certain conditions.

Key Term: principal private residence relief
A relief that exempts all or part of the gain on the sale of a property used as the owner’s main residence, including certain periods of absence.

Conditions for Full Relief

• The property must have been the individual’s main residence.
• The garden or grounds must not exceed 0.5 hectares (unless required for reasonable enjoyment).
• No part of the property has been used exclusively for business.

A taxpayer with more than one residence may nominate which is treated as the main residence for PPR purposes by election within two years of acquiring a second residence. The election is not irrevocable and may be varied. Where a property is held in trust, PPR may be available if the occupier has a right to occupy under the terms of the settlement.

Exclusive business use of any part of the dwelling (for example, a doctor’s dedicated consulting room) restricts relief proportionately for that area. If a room is used for work but not exclusively (for instance, a home office that is also used by the family), relief is generally unaffected.

Deemed Occupation

Certain absences are treated as periods of occupation for relief purposes:

• The last 9 months of ownership (whether or not occupied). If the owner is disabled or moves into a care home, the final period exemption can extend to 36 months.
• Up to 3 years’ absence for any reason (aggregated across the ownership period).
• Any period working abroad (employment duties performed wholly outside the UK).
• Up to 4 years’ absence for work elsewhere in the UK where required by employment or where distance prevents living at home. This extension can continue while the condition persists.
• Up to the first 24 months of ownership where entry is delayed (for example, due to refurbishment or the need to sell a previous home).

Deemed occupation rules apply equally where the relevant employment is that of the taxpayer’s spouse or civil partner.

Partial Relief

If the property was not always the main residence, or was let out, only part of the gain is exempt. Relief is apportioned by reference to qualifying occupation periods (including deemed occupation) over total ownership.

Sale of part of the garden or grounds can be covered by PPR if the area sold forms part of the land enjoyed with the residence and the total area does not exceed 0.5 hectares (or a larger area necessary for reasonable enjoyment). If the house is sold and garden land is retained, a later sale of the land will generally not qualify for PPR.

Worked Example 1.2

Question:
Ben owned a house for 12 years. He lived in it for 8 years, then let it out for 4 years. On sale, the gain is £60,000. What proportion is exempt under PPR relief (ignoring letting relief)?

Answer:
Qualifying occupation: 8 years + last 9 months (0.75 years) = 8.75 years
Exempt gain: (8.75 / 12) × £60,000 = £43,750
Chargeable gain: £60,000 – £43,750 = £16,250

Worked Example 1.3

Question:
Chloe bought her home 10 years ago. She could not move in for the first 12 months due to extensive renovations. She then lived there for 7 years, worked abroad for 2 years, and sold the property 12 months after returning. The gain is £90,000. How much is exempt under PPR?

Answer:
Deemed occupation: first 12 months (entry delayed), 2 years working abroad, and final 9 months.
Qualifying occupation: 12 months + 7 years + 2 years + 9 months = 10 years (the full period).
Exempt gain: £90,000.
Chargeable gain: £0.

Letting Relief

Letting relief may apply if the owner shared occupation with a tenant during the letting period. Since April 2020, relief is only available if the owner lived in the property with the tenant.

Key Term: letting relief
A relief that may reduce CGT when a main residence is let, but only if the owner shared occupation with the tenant during the letting period.

Letting relief is the lower of:

• The amount of PPR relief already calculated
• £40,000
• The gain attributable to the letting period

If the property was fully let without the owner residing with the tenant, no letting relief is available after the April 2020 change; only the normal PPR apportionment and the final period exemption apply.

Worked Example 1.4

Question:
Dee lived in her house for 6 years, then took in a lodger and shared occupation for 2 years, and finally let the whole house for 1 year while she worked away. On sale, the total gain is £72,000. PPR relief for her occupation period and final 9 months removes £54,000 of the gain. Can letting relief reduce the remaining £18,000?

Answer:
Shared‑occupation letting relief may apply to the 2‑year lodger period.
Relief is the lower of: PPR amount (£54,000), £40,000, and the gain attributable to the shared‑letting period.
If the gain attributable to the shared‑letting period is at least £18,000, letting relief can reduce the £18,000 to £0. The fully‑let year without owner occupation does not qualify for letting relief.

Transfers Between Spouses and Civil Partners

Transfers between spouses or civil partners are exempt from CGT. The recipient takes over the original base cost. PPR can be preserved or enhanced by planning which spouse holds the asset at disposal, bearing in mind periods of occupation and elections for main residence.

Key Term: spouse/civil partner exemption
Transfers of assets between spouses or civil partners are not chargeable disposals for CGT; the recipient inherits the transferor’s base cost.

Worked Example 1.5

Question:
Iris bought a second home for £200,000 and later transferred it to her civil partner, Kai, when its market value was £260,000. Kai sells for £300,000, incurring £5,000 selling costs. What base cost applies to Kai?

Answer:
Transfer to a civil partner is no‑gain/no‑loss for CGT; Kai inherits Iris’s base cost.
Base cost: £200,000 (plus any allowable acquisition/ enhancement costs Iris incurred).
Gain: £300,000 – £5,000 – £200,000 = £95,000 (before reliefs/AEA).

Death

No CGT is charged on death. The beneficiary acquires the asset at market value at the date of death.

Key Term: death uplift
On death, assets are revalued to market value for CGT purposes; no gain arises on death.

Personal representatives (PRs) are deemed to acquire estate assets at probate value and may face CGT on disposals during the administration period. PRs have an annual exempt amount for the year of death and the next two tax years, and pay CGT at PR rates (including the higher residential property rate). A distribution in specie to a beneficiary is not a disposal for CGT; the beneficiary takes at probate value and computes any future gain by reference to that base.

Mixed-Use and Business Property

If a property has been used partly as a home and partly for business, PPR relief applies only to the residential portion. Gains on the business part may qualify for business asset disposal relief (formerly entrepreneurs’ relief), subject to conditions. Investment lettings rarely meet the trading criteria for business asset disposal relief; qualifying disposals usually involve trading businesses or certain company share disposals.

Key Term: business asset disposal relief
A relief that reduces CGT to 10% on qualifying business disposals, subject to a lifetime limit and specific criteria.

Apportionment is required by area and sometimes by time. Exclusive business use of an identifiable area prevents PPR relief for that area. Dual‑use rooms generally do not restrict relief. Where property is used for trading purposes (for example, a workshop integrated with a dwelling), a careful analysis is needed to determine the qualifying portion and whether any business relief can apply.

Worked Example 1.6

Question:
Clare buys a house for £300,000. She uses 70% as her home and 30% as an office. She sells for £500,000. What gain is exempt under PPR relief?

Answer:
Total gain: £500,000 – £300,000 = £200,000
Residential portion: 70% × £200,000 = £140,000 (potentially exempt under PPR relief)
Business portion: 30% × £200,000 = £60,000 (may be chargeable, subject to business reliefs)

Worked Example 1.7

Question:
Noah converts a detached garage into a studio used exclusively for his design business (20% of floor area). He sells the property with a total gain of £150,000. He has always occupied the dwelling part as his main residence. How is the gain apportioned?

Answer:
Exclusive business area (20%) is outside PPR relief.
PPR‑exempt portion: 80% × £150,000 = £120,000.
Chargeable portion: 20% × £150,000 = £30,000 (before AEA and rates; consider business reliefs if the disposal qualifies).

Reporting and Payment

Disposals of UK residential property must be reported to HMRC, and any CGT due paid, within 60 days of completion. Failure to comply may result in penalties and interest. This property‑specific reporting is required whether or not the taxpayer is otherwise within self‑assessment for the year. Non‑UK residents must report disposals of UK land (residential or commercial) within the same 60‑day window; UK residents are required to report UK residential disposals.

The 60‑day return requires an estimate of the CGT due (taking account of reliefs and the AEA). The year‑end self‑assessment return later reconciles the position and any balancing payment or repayment is made at that point. Keep records of acquisition and disposal costs, enhancement expenditure, and evidence supporting relief claims (e.g. periods of occupation, employment‑related absences).

Key Term: CGT reporting deadline
The statutory time limit for reporting and paying CGT on UK residential property disposals—currently 60 days from completion.

Worked Example 1.8

Question:
Maya completes the sale of a UK residential investment property on 15 May. By when must she file the CGT property return and pay the estimated CGT?

Answer:
The 60‑day deadline runs from completion.
Filing and payment are due by 14 July.

CGT on Overseas Property

UK residents are liable to CGT on worldwide gains, including overseas property. Double taxation relief may be available if foreign tax is paid. Relief is given by crediting the foreign tax against UK CGT on the same gain, up to the UK liability. Accurate conversion of amounts to sterling at the relevant dates is required.

Worked Example 1.9

Question:
A UK resident sells a holiday home in France, paying French CGT. How is UK CGT calculated?

Answer:
The gain is calculated as usual. UK CGT is due, but credit is given for French CGT paid, up to the amount of UK tax due on the same gain.

CGT on Death and Inheritance

On death, no CGT is charged. The beneficiary acquires the asset at market value at the date of death (the “death uplift”). If the beneficiary later sells, CGT is calculated using the value at death as the base cost.

Personal representatives compute gains by reference to probate value. They have an annual exempt amount for a limited period (year of death and the next two tax years) and pay CGT on any gains realised on disposals during administration. Distributions of assets to beneficiaries in satisfaction of legacies are not disposals for CGT.

CGT and Gifts

A gift of property is treated as a disposal at market value for CGT purposes, unless the gift is to a spouse or civil partner. Hold‑over relief may be available on gifts of certain business assets (for example, land and buildings used in a qualifying trade), deferring the gain into the hands of the transferee who takes a reduced base cost. Gifts to charities are exempt disposals.

Where a property is gifted and the donor continues to enjoy it (for example, remaining living in a gifted home), consider inheritance tax anti‑avoidance rules (gifts with reservation of benefit). These are separate from CGT, but practitioners must have regard to both regimes when advising on gifts of residential property.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• CGT is charged on the gain made when a chargeable asset, such as property, is disposed of.
• The chargeable gain is calculated as disposal proceeds minus acquisition cost and allowable costs.
• Principal private residence relief can exempt all or part of the gain on the sale of a main residence.
• Letting relief is available only if the owner shared occupation with the tenant during letting.
• Transfers between spouses or civil partners are exempt from CGT.
• Mixed-use properties require apportionment; business asset disposal relief may apply to business parts.
• Disposals of UK residential property must be reported and CGT paid within 60 days of completion.
• Gifts (other than to a spouse/civil partner) are disposals at market value for CGT.
• No CGT arises on death; the beneficiary’s base cost is the market value at the date of death.
• The market value rule applies to non‑arm’s‑length transactions and connected‑party disposals.
• The annual exempt amount reduces taxable gains, and capital losses are offset before the AEA is applied.

Key Terms and Concepts

• chargeable gain
• disposal
• chargeable asset
• allowable costs
• annual exempt amount (AEA)
• market value rule
• principal private residence relief
• letting relief
• spouse/civil partner exemption
• death uplift
• business asset disposal relief
• CGT reporting deadline