Capital Gains Tax exemptions

You need to be aware of the most important Capital Gains Tax exemptions.

There are many types of gains which do not attract Capital Gains Tax.

There are three exemptions in particular which are those most commonly used.

 

Private Residence Relief

Possibly the most important capital gains tax exemption is your family home. There is a total exemption from Capital Gains Tax where the gain is realised by your disposal of your family home. That is, a property that has been your sole or main residence throughout the period of ownership.  There is a restriction that the gardens or grounds should be half a hectare or less. Half a hectare is about 50 metres x 50 metres or 1.23 acres.

If you are married and living together you can only have the exemption for one property between you for a particular period. In these notes ‘married couples’ includes civil partners.

A delay of up to 12 months is allowed (or 24 months if a good reason can be shown) between your acquiring a property and taking up residence. 

The last 9 months of ownership also qualify even if you no longer live in the property provided that it was previously your main residence.

Using part of your property for a trade or letting part of it

What if you have used part of your property exclusively for the purposes of a trade, business, profession or vocation. In that case the exemption does not cover the part of the gain attributable to that part.  This restriction does not apply where you used the relevant rooms for part business/part personal.

Eric is a financial adviser whose living room doubles as his ‘home office’ for a few days each week.  There is no restriction under this provision.

If you have let part of the property a similar situation applies. Here ‘letting relief’ is available but only if you also lived in the property while part was let out. 

Where you have two or more homes

Where you have more than one residence, you are entitled to elect that one of them be treated as your main residence for the main residence exemption to apply. This election must be made within two years of acquiring the second (or subsequent) residence. It is, however, essential that any property that is so elected to be your principal private residence is in fact a residence. Thus, property that is rented and which you are, in fact, excluded from occupying, could not qualify as a residence.

From a tax planning viewpoint, it would be most beneficial to elect for the property which is likely to produce the highest capital gain from the date of acquisition of the second property to be treated as the main residence.

Where the election would, based on the above, be for the first property, it is possible to obtain some relief on the second property by electing for the second property at the time of its acquisition, then, within the two year period, changing the election in favour of the first property. In this way, gains for the temporary election period plus the last nine months of ownership of the second property would be exempt.

It is important to note that, from 6 April 2015, an individual can only nominate an overseas property to be treated as their main residence if they have lived in it for at least 90 days in the tax year.

Annual Exemption

This is one of the most important capital gains tax exemptions.  You are not liable for capital gains tax unless you make gains of more than the annual exemption. For the current tax year 2022/23 your annual exemption is £12,300.

If you are married both you and your spouse each have an annual exemption.  It is therefore beneficial for you to hold chargeable assets in joint names. The effect would be that, currently, gains of £24,600 can be covered.

As this is an annual exemption it is an important part of your ongoing financial planning to make use of this each year where possible.

Peter, a higher rate tax payer, invested £200,000 in a portfolio of unit trusts in 2017 and was pleased to see that after five years it had grown to £320,000.  He had always invested the maximum in ISAs elsewhere.  However, he was less pleased when he encashed his investment to face a Capital Gains Tax bill of £21,540 i.e. (£120,000 – £12,300) x 20%.

Sarah, a higher rate tax payer, also invested £200,000 in a portfolio of unit trusts in 2017 which also grew to £320,000.  However Sarah invested jointly with her husband and sold sufficient shares each year to make use of both of their Capital Gains Tax exemptions (totalling £116,800 over the five years).  The result was that when Sarah encashed their joint portfolio there was no Capital Gains Tax to pay as she had ‘washed out’ nearly all the gains over the last five years and the remaining gains will be well within their joint Capital Gains Tax annual exemption for the current year.

Spouse Transactions

This is a further important capital gains tax exemption. In these notes ‘spouse’ includes a civil partner. There are no chargeable gains on assets that you give or sell to your spouse.  The asset is treated as passing across on a no-gain/no-loss basis. Therefore your spouse is deemed to have acquired the assets at the original cost you paid.  Likewise you cannot claim losses on these assets.

This means that you as the donor are treated as disposing of the asset at its base cost at the date of disposal (not the market value). Your spouse, the donee, is treated as receiving the asset for exactly the same value (i.e. the original base cost) on the date of transfer.

Roger bought a second home by the coast in 1999 for £65,000. In 2006 he spent £27,000 on renovating the property. In 2012 he married Pauline. In May 2019 Roger made a gift of the second home to Pauline when it is worth £400,000.

Roger is treated as having made a disposal for Capital Gains Tax purposes of an asset with a base cost of £92,000 for consideration of £92,000. In this way there is no gain and no loss as the base cost equals the disposal proceeds. Pauline is treated as having acquired the property in May 2010 at a cost of £92,000 (her base cost for any subsequent disposal).

In effect Pauline steps into Roger’s shoes for Capital Gains Tax purposes so that if she sells the property any capital gain will be based on its original purchase price in 1999 of £92,000.

Given that both you and your spouse have your own annual exempt amount. And the rate of capital gains tax is determined by adding the gain to your income. It makes sense to:

  • hold assets in joint names, where possible, so that any gain can be reduced by two annual exempt amounts. Furthermore any gain can use up any excess of basic rate tax allowance for both of you, and
  • transfer assets from you to your spouse if you have already used up your capital gains tax exempt amount for the year.

 


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Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.