BUSINESS TAXATION

Capital Gains Tax – how is my investment property affected?

When a person sells their family home, they do not usually need to concern themselves with capital gains tax (CGT), as they have the benefit of Principle Private Residence (PPR) relief to utilise against their main residence at the time of sale to prevent any capital gains tax arising.

However, when an individual owns investment property, CGT may be payable when any of these additional properties are sold. We take a look at when an individual may need to consider CGT and the possible impact.

The figures

CGT is calculated on the profit between the acquisition value of the property and the sale value. The current rates (for 2024/2025) are as follows:

  • For lower rate taxpayers the rate is 18%
  • For higher rate taxpayers the rate is 24%

Each individual also has an annual allowance for CGT which is currently £3,000 for the 2024/2025 tax year. However, where spouses own investment properties jointly, they should consider combining their allowances. If an individual owns investment properties in their sole name, they should consider transferring a percentage of the property to their spouse before selling on the open market to make use of their combined allowances.

When calculating the extent of the liability an assessment of potential deductions will be necessary, which includes any estate agents and solicitor’s fees connected to the original purchase and subsequent sale. However, the rules around what would be considered ‘improvement work’ are specific and this should be evaluated on a case by case basis. Advice should be sought as, for example, general upkeep could not be taken into account.

Hybrid working

The concept of hybrid working has developed over time which has allowed many people to work in a city and live further afield, splitting their time between home and the office. Depending on how far the commute is, some opt to purchase a smaller property near the office and reside there on the days they are working from the office to cut out the commute. In this scenario, if they eventually decide to sell this investment property, they must consider the CGT implications and assess whether PPR may apply.

Where an individual owns more than one dwelling house, some analysis will be required to assess which is to be considered their main residence for the purposes of PPR. They may be able to nominate this property as their main residence to make use of PPR ahead of selling the property, provided certain requirements are fulfilled and time limits are followed.

Letting a room

As has been discussed, PPR relief will apply where a property is a person’s main residence. However, when a room is let as residential accommodation, that section of the property loses the benefit of PPR for that period. It is important that those renting rooms as residential accommodation do not ignore the CGT implications and take advice. This advice would usually include an assessment as to whether another relief, Letting Relief, is available to potentially catch any gain which would have used PPR – the main contingency being the landlord must also reside in the property.

The amount of letting relief you can claim will be the lowest of either:

  • the gain you receive from the letting proportion of the home
  • the amount of private residence relief you can claim
  • £40,000

There are rules determining when PPR and letting relief are available, and both cannot be offset against the same part of the property. Care must be taken and advice should be sought to determine which allowances can be used, and for what period, to ensure the CGT calculation is correct.

If either of these scenarios apply to you, or you feel you may be in a situation where you need to assess the implications of CGT or need other advice relating to tax, please contact Ingrid McCleave on 02078221632.

About the authors


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Ingrid McCleave

Partner

Specialises in tax and succession planning, with expertise in corporate and private client tax matters.
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Abigail Bartlett

Solicitor

Experience advising on a variety of private client matters including estate administration, deeds of variation, and the preparation of Wills and LPAs.

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