Category: Capital Gains Tax

Tax effects of letting out part of your home

If you have tenants living in your property, it is important to understand the Capital Gains Tax (CGT) implications. In most cases, there is no CGT to pay when you sell a property that has been your main residence, as the gain is covered by Private Residence Relief (PRR). However, if you have let out part of your home, your entitlement to full PRR may be restricted.

However, you may be entitled to letting relief, provided you lived in the property at the same time as your tenant. Letting relief is only available where there has been shared occupation between homeowner and tenant.

The maximum letting relief available is the lower of £40,000, the amount of PRR due, or the gain attributable to the part of the property that was let. For example, if you rented out a large bedroom representing 10% of your home and later sold the property at a gain of £75,000, you would qualify for PRR on 90% of the gain (£67,500). The remaining £7,500 would relate to the let portion. As this is lower than both £40,000 and the PRR due, the full £7,500 would qualify for letting relief. In this scenario, the entire £75,000 gain would be covered by PRR and letting relief, meaning no CGT would be payable.

You are not considered to be letting out your home if you have a lodger who shares living space with you. Also, if children or parents live with you and contribute towards household expenses, this is not normally treated as a formal letting for CGT purposes, and full PRR is likely to remain available.

Claiming Business Asset Rollover Relief

Claiming Business Asset Rollover Relief allows for the deferral of Capital Gains Tax (CGT) when taxpayers sell or dispose of certain assets and use all or part of the proceeds to buy new business assets. The relief means that the tax on the gain of the old asset is effectively rolled over into the cost of the new asset with any CGT liability deferred until the new asset is sold.

Where only part of the proceeds from the sale of the old asset is used to buy a new asset a partial rollover claim can be made. It is also possible to claim for provisional rollover relief where the taxpayer expects to buy new assets but has not yet done so.

Business Asset Rollover Relief can also be claimed if taxpayers use the proceeds from the sale of the old asset to improve assets they already own.

The total amount of rollover relief is dependent on the total amount reinvested to purchase new assets.

The main qualifying conditions to be met to when claiming relief are as follows:

• you must buy the new assets within 3 years of selling or disposing of the old ones (or up to one year before);
• your business must be trading when you sell the old assets and buy the new ones; and
• you must only use the old and new assets for trading.

Under certain circumstances, HMRC has the discretion to extend these time limits. In addition, both the old and new assets must be used by your business, and the business must be trading when you sell the old assets and buy the new ones.

Taxpayers must claim relief within 4 years of the end of the tax year when they bought the new asset (or sold the old one, if that happened after).

Eligibility for Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) can significantly reduce the Capital Gains Tax due when selling a business or shares, but with higher rates coming from April 2026, timing and eligibility matter more than ever.

BADR applies to the sale of a business, shares in a trading company, or an individual’s interest in a trading partnership. When this relief is available, a reduced Capital Gains Tax (CGT) rate, currently 14%, is applied instead of the standard rate. These rates will increase in the new tax year starting on 6 April 2026 to 18%. As a result, disposals made after April 2026 will face a higher CGT rate.

To qualify for BADR, certain conditions must be met:

Sale of a Business or Business Closure:

• You must be a sole trader or business partner; and
• You must have owned the business for at least 2 years leading up to the sale or closure.
• You must dispose of your business assets within 3 years to qualify.

Sale of Shares or Securities:

Both of the following must apply for at least 2 years up to the date you sell your shares:

• You must be an employee or office holder of the company (or a company within the same group).
• The company’s main activities must involve trading, not non-trading activities like investment, or it must be the holding company of a trading group.

Additional rules can apply if the shares are from an Enterprise Management Incentive (EMI).

Currently, you can claim a total of £1 million in BADR over your lifetime, allowing you to qualify for the relief multiple times. The lifetime limit may be higher if you sold assets before 11 March 2020.

Selling a second property?

CGT on certain UK residential property sales often has a strict 60-day reporting and payment deadline, so early planning can avoid penalties.

If you are selling a second property, such as a buy-to-let or a former home that is no longer your main residence, CGT will usually apply. This is different from selling your main home, which is often covered by Principal Private Residence (PPR) relief and therefore exempt from CGT.

The annual exempt amount applicable to Capital Gains Tax (CGT) is currently £3,000. CGT is normally charged at a simple flat rate of 24% and this applies to most chargeable gains made by individuals. If taxpayers only pay basic rate tax and make a small capital gain, they may only be subject to a reduced rate of 18%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 24% CGT. 

Most homeowners do not pay CGT when selling their main family home, as PPR relief usually applies. However, CGT is commonly payable on gains from:

• Buy-to-let properties
• Second homes or holiday homes
• Business premises
• Land
• Inherited property (based on the increase in value since inheritance, not since original purchase)

Any CGT due on the sale of UK residential property must usually be reported and paid within 60 days of completion. This requires submitting a UK Property CGT return and making a payment on account within that timeframe.

Failing to meet the 60-day deadline can result in penalties and interest, so it is important to plan ahead and obtain advice as early as possible when selling a property that is not fully exempt.

Nominating a property as your home

Owning more than one home can create valuable Capital Gains Tax planning opportunities, but only if you understand how and when to nominate a property for Private Residence Relief.

Typically, you do not have to pay Capital Gains Tax (CGT) when you sell a property that has been your main family home. In contrast, properties that have only been used as investments and never as a primary residence do not qualify for this exemption. This tax relief is known as Private Residence Relief (PRR).

It is increasingly common for taxpayers to own more than one home, and there are a number of important considerations for homeowners. An individual, married couple, or civil partnership can only benefit from PRR on one property at a time. However, it is possible to choose which property benefits from the CGT exemption when it is sold by making an election.

To nominate a property as your main home, you must write to HM Revenue and Customs (HMRC), specifying the full address of the home you want to nominate. All owners of the property must sign the letter. If your combination of homes changes, you must make a new nomination within two years of the change. You must also have lived in the house as your main or only residence at some point in the past.

Special rules apply for overseas properties and for non-UK residents. Since 6 April 2015, an overseas property can only be nominated if you lived in it for at least 90 days in the tax year. It is important to carefully consider the timing and frequency of making or changing an election to ensure maximum relief.

Even if you own more than one home, certain periods always qualify for relief. You are entitled to PRR for the last nine months before you sell your property, even if you were not living there at the time. Other qualifying periods may include the first two years of ownership if the property was being built or renovated, or if you could not sell your previous home, provided you lived in it as your only or main residence within two years of acquiring it.

Selling your UK home and living abroad

If you live abroad and sell your UK home, you may have to pay Capital Gains Tax (CGT) on any gain made since 5 April 2015. Only the portion of the gain made after 5 April 2015 is liable for tax. One of the most commonly used and valuable exemptions from CGT is Private Residence Relief (PRR), which applies when a property has been used as your main family home. Investment properties that have never been your main residence do not qualify for any CGT relief.

For non-UK residents, PRR can still apply, but there are additional conditions. You may not have to pay CGT for any tax year in which you, your spouse, or civil partner spent at least 90 days in the UK home, provided you meet the necessary conditions and nominate it as your only or main home when reporting the sale to HMRC.

Certain parts of the property, such as areas let out, used exclusively for business, or grounds larger than 5,000 square metres, may reduce the relief. You also automatically receive relief for the last nine months of ownership (or 36 months if you are disabled or in long-term care). 

Regardless of whether any tax is due, you must submit a Non-Resident CGT (NRCGT) return and pay any CGT within 60 days of the sale. Penalties apply if the return is late or tax is unpaid by the deadline. Even if there is no CGT to pay the return must still be submitted by the deadline.

What is a demerger?

A demerger involves splitting the trading activities of a single company or group into two or more independent entities. This can be facilitated by distributing the assets of a holding company to its shareholders.

There are special statutory demerger provisions that are designed to make it easier to divide and put into separate corporate ownership the trading activities of a company or group of companies. An exempt demerger will be deemed to occur under these provisions. As a result, the distribution is typically exempt from Income Tax and usually does not trigger any Capital Gains Tax, as the gains are effectively rolled over.

The provisions do not apply where a trading activity is to be sold or becomes owned by a person other than the existing member of the original company.

The provisions allow for the removal of the distribution charge in appropriate circumstances, making the distribution an ‘exempt distribution’. This applies to trading activities only. Companies that utilise the demerger provisions range from small private businesses to some of the largest public companies in the UK.

The legislation also provides for a clearance procedure. Under this a company that wants to demerge trading activities can obtain advance confirmation from HMRC that the distribution that will arise will be an exempt distribution.

Business Asset Disposal Relief – the present rates

If you are thinking about selling a business or shares, it is important to understand how Business Asset Disposal Relief works, particularly with rates set to increase from April 2026.

Business Asset Disposal Relief (BADR) provides a valuable tax advantage, offering a reduced rate of Capital Gains Tax (CGT) on the sale of a business, shares in a trading company or an individual’s stake in a trading partnership.

The present rate of BADR is 14% for disposals made during the 2025-26 tax year. Currently, these rates are set to increase in the 2026-27 tax year starting on 6 April 2026 to 18%. As a result, disposals made after April 2026 will face a higher CGT rate.

These planned changes in the BADR rates can have a significant impact on tax planning for business owners and investors. Furthermore, it is worth noting that upcoming measures in the Autumn Budget could further diminish the benefits of these reliefs.

Despite these changes, the lifetime limit for claiming BADR currently remains at £1 million, which means that individuals can use the relief multiple times, provided their total gains from qualifying disposals do not exceed this threshold.

Changes have also been made to Investors’ Relief. As of 30 October 2024, the lifetime limit for Investors' Relief was reduced from £10 million to £1 million, with CGT rates now aligning with those for BADR at 14% and set to rise to 18% in April 2026.

Report and pay Capital Gains Tax

If you have sold a UK residential property since 6 April 2020, it is important to be aware that the reporting and payment deadlines for Capital Gains Tax have changed. For property sales completed on or after 27 October 2021, any Capital Gains Tax that becomes payable must now be reported and paid within 60 days of completion. This applies where the property is not fully covered by the private residence exemption. For example, where the property was a rental property, a second home, or only partly used as your main residence. If the property was jointly owned, each owner must report their own share of the gain.

To calculate the gain, you will need information about the dates of purchase and sale, the original purchase price, legal fees and other costs, plus any significant improvement expenses. Estate agency and legal costs on sale will also be needed. The sooner you gather these details, the easier it is to meet the deadline.

For other types of capital gains, for example shares, investments, or commercial property sold by a UK resident, the reporting is usually carried out through your Self Assessment return for the tax year concerned. In some cases it is possible to report gains in real time, rather than waiting until the tax return is due, but this depends on the circumstances. 

If you use the “real time” Capital Gains Tax service, this is available for UK residents disposing of certain assets (not including UK residential property) in the current tax year. If this route is used, the reporting deadline is by 31 December after the end of the tax year of disposal, with payment due by 31 January.

If you think you may have sold or are planning to sell a property or other asset that could give rise to a taxable gain, please contact us as soon as possible. Early information means that we can ensure the calculations are correct and the reporting deadlines are met, which helps avoid unnecessary interest or penalties.

Claiming lettings relief

If you have tenants in your home, it’s essential to understand the Capital Gains Tax (CGT) implications. Typically, there is no CGT on the sale of a property used as your main residence due to Private Residence Relief (PRR). However, if part of your home has been let out, your entitlement to PRR may be affected.

Homeowners who let out part of their property may not qualify for the full PRR, but they could be eligible for letting relief. Letting relief is available to homeowners who live in their property while renting out a portion of it.

The maximum letting relief you can claim is the lesser of the following:

• £40,000
• The amount of PRR due
• The chargeable gain made on the part of the property let out

Example:

• You rent out a large bedroom to a tenant, making up 10% of your home.
• You sell the property and make a gain of £75,000.
• You qualify for PRR on 90% of the property (£67,500).
• The remaining gain of £7,500 relates to the portion of the home that’s been let.

In this case, the maximum letting relief due is £7,500, which is the lower of:

• £40,000
• £67,500 (the PRR due)
• £7,500 (the gain on the part of the property that’s been let)

As a result, you would not owe any CGT—the £75,000 gain is fully covered by £67,500 in PRR and £7,500 in letting relief.

Note that if you have a lodger who shares living space with you or if your children or parents live with you and pay rent or contribute to housekeeping, you are not considered to be letting out part of your home for tax purposes.