How much is CGT on the sale of a former let property?

February 9, 2023

Let's say you're selling a home that was previously rented out as a vacation rental two years ago. Let's say you, your family, and your friends have used it on occasion since then. Is the special lower capital gains tax rate still applicable to the gain you make?

CGT Rates

As you are probably aware, taxable gains made by individuals on the sale of residential property are subject to higher rates of capital gains tax (CGT). Basic and higher rate taxpayers pay 18% and 28%, respectively.

Property and BADR businesses

A gain that relates to business assets that qualify for business asset disposal relief is exempt from the higher CGT rates (BADR). Furnished properties rented out as holiday accommodation (furnished holiday lets (FHLs)) are considered business assets for this purpose. To qualify as an FHL, a property must be rented on specific terms and for specific lengths of time. Gains from the sale of a property can qualify for BADR where FHL status is applicable.

Non-qualifying real estate

In the preceding scenario, the property ceased to be an FHL over two years ago, so it may appear that no entitlement to the BADR 10% tax rate exists.

Tip: The BADR rate may apply if the previously qualifying asset, in this case a property, is sold within three years of the holiday letting business ceasing. This means that in our scenario, BADR can be applied to any profit from the sale.

Tip:There is no need to make any adjustments to account for periods (in this case, the last two years or so) when the BADR conditions are not met.

Trap:If the gain from the sale of the property occurs more than three years after the FHL business has ceased, the higher CGT rates of 18% and 28% apply to the entire gain. Remember that the date a gain occurs is the date the seller and buyer sign the contract for sale. It's not the finish date.

The end of an FHL company

In our example, the individual had only one FHL-qualifying property. That is, the end of his FHL business was the date when the FHL qualifying conditions ceased to apply.

Example In early 2010, Sarah purchased an apartment. It was let on terms that qualified it as an FHL until Spring 2019. Since then, he has rented it less frequently and used it more frequently for himself, so the property has not been an FHL for more than three years. Sarah recently signed a contract to sell the property for a capital gain. Sarah will be taxed on the gain at 18% or 28%, depending on his income, after deducting his annual exemption and CGT losses (if he has any).

Can BADR be extended?

If Sarah also owned another property that qualified as an FHL but was not sold, his property rental business would not have ended with the sale of the apartment. Given that all properties let by the same person are treated as a single rental business under tax rules, could this bring the gain on the apartment within the BADR time limit? Regrettably, no. FHLs are exempt from the standard rule that treats all rented properties as part of a single business. Sarah must sell the apartment within three years or risk losing his right to BADR.

When a business asset is sold within three years of the business ceasing, the 10% business asset disposal relief tax rate applies, subject to the usual conditions. Remember that the contract date is the date of sale, not the date of completion.

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