Capital Gains Tax (CGT) is rarely the focus of a residential conveyancing transaction. However, CGT issues do arise more often than clients expect and, if missed, can result in unexpected tax bills and tight post-completion reporting deadlines.
Whilst conveyancers are not expected to provide tax advice, early awareness of common CGT risk areas, and timely signposting to a tax adviser, can help clients avoid problems further down the line.
When is Private Residence Relief (PRR) available?
Most clients are aware that CGT relief is usually available on the sale of a main residence, known as Private Residence Relief (PRR). What is less well understood is that PRR is not automatic and the rules are surprisingly complex.
In broad terms, full PRR is only available where a property genuinely qualified as the owner’s only or main residence for the entire period of ownership. Where that is not the case, a CGT liability may arise.
CGT exposure commonly occurs where the property has:
- been let out for a period
- been occupied only part time
- been owned while the seller lived or worked elsewhere
- included an annexe or self contained accommodation
- had large gardens or extensive land
- been used, in part, for business purposes
Does Private Residence Relief apply when a property is only occupied for part of the ownership period?
Where a property has only been occupied as a main residence for part of the ownership period, PRR will normally only apply to that period.
There may be additional relief where the property has been let, but these rules have been significantly tightened in recent years. Lettings relief now generally only applies where the owner lived in the property at the same time as the tenant. It is no longer available where the property was let on a standalone basis.
There can also be relief for certain periods of non occupation, for example where the owner was required to live elsewhere for work. However, these provisions are technical and often misunderstood, so early tax input is advisable.
Does Private Residence Relief include garden, ground and additional buildings?
PRR can extend beyond the main house to include land and buildings that are occupied and enjoyed with it as part of the garden or grounds.
There is, however, a permitted area limit of 0.5 hectares, unless a larger area is required for the reasonable enjoyment of the property having regard to its size and character.
Where gardens or land exceed this limit, it is possible that part of the sale proceeds will fall outside PRR and be subject to CGT. This is a common issue for rural properties, smallholdings and homes with paddocks or fields.
Similarly, additional buildings, such as annexes, studios or barns, may not qualify for PRR if they fall outside the main curtilage or have not been occupied as part of the main residence.
Does Private Residence Relief apply to properties used for business purposes?
Where part of a property has been used exclusively for business purposes, PRR is restricted accordingly.
Typically, a proportion of the gain is exposed to CGT, based on:
- the amount of floor space used exclusively for business, and
- the length of time that use applied
This commonly arises where a room has been used solely as an office, clinic or consulting space, rather than for mixed personal and business use.
Gifting properties
CGT is not limited to sales for cash. Gifting a property, for example to a family member, is also treated as a disposal for CGT purposes, even where no money changes hands.
In these cases, the disposal proceeds are deemed to be the market value of the property at the date of the gift, which can give rise to a taxable gain.
60-day CGT reporting requirement
Where a taxable gain arises on the sale or gift of UK residential property, the individual disposing of the property must:
- report the gain, and
- pay the CGT due within 60 days of completion or transfer
This deadline often catches clients by surprise, particularly where they have assumed no CGT applies. Early identification of potential CGT exposure is therefore crucial.
See our separate article on 60-day CGT returns for further detail.
A simple CGT signpost checklist for conveyancers
CGT advice should be considered where:
- the property was not the owner’s only or main residence throughout
- any part has been let, occupied separately or used as an annexe
- the gardens or land are extensive
- there has been farming, equestrian or other business use
- the transaction involves a gift, transfer or other non standard disposal
Early signposting in these situations can make a significant difference and help ensure clients are properly advised before completion.
How we can help
If any of the scenarios above arise during a transaction, early input from a tax specialist can help clients understand their position, plan appropriately and avoid missed reporting deadlines.
Our private client tax team regularly works alongside conveyancers to identify CGT risks, quantify potential exposure and deal with 60-day CGT reporting where required. An early conversation can often provide reassurance, and in some cases prevent an unexpected tax liability from arising at all.
If you or your clients would like to discuss a transaction, please get in touch with our tax team for an initial conversation.
