The 36-month rule for capital gains tax used to be a lifesaver for homeowners, but times have changed. Let’s dive into what this rule means for you and your property.
What is the 36-month rule for capital gains tax?
The 36-month rule was a tax relief that allowed homeowners to avoid paying capital gains tax on the last 36 months of ownership, even if they weren’t living in the property during that time. However, this rule has undergone significant changes in recent years.
Here’s a quick timeline of how the rule has evolved:
• Before April 2014: 36-month exemption period
• April 2014 to April 2020: 18-month exemption period
• From April 2020 onwards: 9-month exemption periodThese changes have had a big impact on how much tax people might owe when selling a property that’s not their main home.
How does the current rule work?
Now, the last 9 months of ownership are exempt from capital gains tax, regardless of whether you’re living in the property or not. This applies to properties that have been your main home at some point during ownership.
For example, if you owned a house for 10 years and lived in it for 5 years before moving out and renting it, you’d get:
• Full relief for the 5 years you lived there
• Full relief for the final 9 months of ownership
• Partial relief for the remaining 4 years and 3 months
Are there any exceptions to the 9-month rule?
Yes, there are a few exceptions:
- Disabled individuals
- Those in long-term residential care
- People who sold their property before 6 April 2020
For these groups, the 36-month rule still applies, giving them more time to sell without incurring capital gains tax.
What expenses can I deduct from my CGT bill?
You can reduce your CGT bill by deducting certain costs:
- Stamp duty paid when buying the property
- Estate agent and solicitor fees
- Costs of improvement works (not regular maintenance)
How is capital gains tax calculated on property?
Capital gains tax on property is calculated based on the profit you make when selling. Here’s a simple breakdown:
- Work out your gain: Sale price – Purchase price – Improvement costs
- Deduct your tax-free allowance (£3,000 for 2024/25)
- Calculate the tax owed based on your tax band.
| Tax Band | Basic Rate | Higher Rate |
|---|---|---|
| CGT Rate | 18% | 28% |
Remember, these rates are for residential property. Other assets have different rates.
Tip: Keep detailed records of all improvements you make to your property, as these can be deducted from your gain.
What about private residence relief?
Private residence relief can help reduce your capital gains tax bill. If you’ve lived in the property as your main home for the entire time you’ve owned it, you won’t pay any capital gains tax when you sell.If you’ve only lived there for part of the time, you’ll get relief for:
• The time you lived there
• The last 9 months of ownership (or 36 months if you qualify for the exception).
Tip: If you have more than one property, you can nominate which one is your main residence for tax purposes. This can be a useful tax planning tool.
Do I have to pay capital gains tax if I sell my house and buy another?
If you’re selling your main home and buying another, you usually won’t have to pay capital gains tax. However, if you’ve let out part of your home or used it for business, you might have to pay some tax on the profit.
What about letting relief?
Letting relief used to be a valuable way to reduce capital gains tax for landlords. However, since April 2020, it only applies if you shared the property with your tenant. This change has made it much less common.Tip: If you’re planning to let out your property, consider living there for a period first to potentially benefit from letting relief.
How long do you need to live in a house to avoid capital gains tax?
There’s no set time you need to live in a house to avoid capital gains tax entirely. However, the longer you live in the property as your main home, the less tax you’re likely to pay when you sell.
Reporting & paying capital gains tax
Since April 2020, you need to report and pay any capital gains tax on UK residential property within 60 days of completion. This is a big change from the previous system, where you could wait until your annual tax return.Tip: Set a reminder for yourself as soon as you agree to sell your property to ensure you don’t miss this deadline.
Final thoughts
The 36-month rule for capital gains tax has changed a lot over the years. It’s now much shorter at 9 months for most people. If you’re thinking of selling a property that’s not your main home, it’s worth getting advice to make sure you understand the tax implications.
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