Taxation in property transactions - Capital Gains Tax implications (overview)

Learning Outcomes

After studying this article, you will be able to explain when Capital Gains Tax (CGT) arises in property transactions, identify what constitutes a chargeable gain, apply the main CGT reliefs (including principal private residence relief and letting relief), and calculate CGT liabilities in straightforward and mixed-use scenarios. You will also understand the reporting obligations and common pitfalls relevant to SQE1.

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. In your revision, focus on:

• 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

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.

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.

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.

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.

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.

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.

Deemed Occupation

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

• The last 9 months of ownership (whether or not occupied).
• Up to 3 years’ absence for any reason.
• Any period working abroad.
• Up to 4 years’ absence for work elsewhere in the UK.

Partial Relief

If the property was not always the main residence, or was let out, only part of the gain is exempt.

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

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

Transfers Between Spouses and Civil Partners

Transfers between spouses or civil partners are exempt from CGT. The recipient takes over the original base cost.

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.

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.

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.

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.

Worked Example 1.3

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)

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.

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

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.

Worked Example 1.4

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.

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.

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.

Key Terms and Concepts

• chargeable gain
• disposal
• chargeable asset
• allowable costs
• principal private residence relief
• letting relief
• spouse/civil partner exemption
• death uplift
• business asset disposal relief
• CGT reporting deadline