How long must one remain a UK resident before selling a home free of the country's capital gains tax?

When you sell a property and make a profit, you must pay capital gains tax (CGT) in the United Kingdom. It does not, however, apply to primary residences, but rather to second homes and buy-to-let properties.

Under certain conditions, such individuals may be able to reduce the amount of CGT they pay.

The CGT amount for residential properties is affected by the number of years you live in the property. We can say that the longer you live in a property, the greater your CGT relief.

Here is a helpful guide for property sellers to understand how long you must live in a property to avoid capital gains tax in the UK. We'll go over the following topics:

What exactly is capital gains tax?

The CGT is a tax on profits made after selling a property in the United Kingdom. CGT generally refers to the sale of a buy-to-let property or a second home. Individuals must pay a portion of CGT if they use a portion of their home as a business premise.

The basic rate of CGT on profits is 18%. Simultaneously, the higher and additional CGT rate is 28%. Every capital gain increases your income and falls under the income tax bracket for the fiscal year.

Capital gains tax rates

Photographer: The New York Times

For 2022-23, the tax-free capital gains amount is £12,300. Individuals who earn more than this amount are subject to CGT. A couple can make a tax-free capital gain of £24,600 together.

How long must you live in a property to avoid CGT?

To avoid CGT, you must live in the property for the entire time you own it. If you live in your residential property as your primary and only residence, there is no Capital Gains Tax. It is referred to as the Private Residence Relief (PRR).

To make the property your permanent residence, you must live there for at least one year. You have the option of relocating for a variety of reasons. According to the HMRC, you are eligible for PRR.

  • For the time you live in the property, and
  • If you no longer live there, the last nine months of your ownership period.
You own a property of 10 years

You have owned a property for ten years.

Can PRR be extended?

Under certain conditions, you can return to your home to extend your PRR:

  • You didn't live in your new home for a year because you couldn't sell your old one.
  • You've been waiting in the old house for a year because the new house is being renovated.
  • You could be gone for 36 months for some reason and then return right away.
  • If you are working somewhere far away from home, the PRR allows for 48 months of absence, but you must return after that time.
  • PRR considers an unlimited absence if you work for an overseas company. Unless you permanently settle there and sell the old property, you must return.

Is PRR applicable to commercial property?

No, this relief does not apply to commercial properties. You are eligible for PRR if you own a residential property or more than one.

If you sell all or part of your home for a profit or use it solely for business purposes, no capital gains tax relief is available.

Who qualifies for Private Residence Relief?

Individuals may be eligible for PRR if they profit from the sale of their sole primary residence.

You are also eligible for the relief if you meet the following criteria:

  • If you own your home outright,
  • You are a leasehold tenant.
  • You and someone else share ownership of a freehold or lease.

How to Work Out the Relief Amount

The amount of relief is determined by the number of years you live in the property.

Consider the following example:

  • You buy a house for £200,000 and sell it for £300,000 after ten years (120 months). The sale results in a taxable gain of £100,000 for you.
  • You lived in the house for the first three years before renting it out.
  • The PPR is valid for three years and the last nine months of your stay.
  • You'll get PPR for 45 months (36 months 9 months), for a total of 37 months. 5% of the total time (45 months divided by 120 months) As a result, the relief amount is 37. I'll take 5% of the profit. e , £37,500
  • The remaining 62 are as follows: Because PPR does not cover this portion of your profit, the chargeable CGT is 5% of the gain of £62,500.

If you sold the property between April 6, 2014 and April 6, 2020, you received PRR for the last 18 months of your residence. However, beginning April 6, 2021, you will receive PRR for the previous nine months of ownership.

How to Apply for the PPR

1. You have used a portion of your property as a residence.

You can claim relief for your dwelling section if you share a portion of your property with tenants.

For example, suppose you lent a room in your home worth 10% of the total value.

You now want to sell the property in order to reduce CGT. Only the remaining 90% of your dwelling property is eligible for relief, and 10% is chargeable.

2. You've been here for a while.

You can only claim PR for the time you lived on the property. HMRC may consider your absence from the residential property in certain circumstances.

3. The development value of your property

PPR is only applicable to the actual value of your property, not its development value. In this case, you must calculate the partial PPR by deducting a portion of your expense from the property's current use value.

Report your Capital Gains Tax and the PRR to HMRC by the 31st of January of each year.

Finishing up

Capital Gains Tax is one of several taxes that an individual must pay to the HMRC when selling a property. Council tax, income tax on rental property rent, and inheritance tax on property gifts are a few examples.

Because of their complexity, taxes may be difficult for people to understand. They can seek the advice of tax professionals to better understand CGT and other similar taxes.

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