The 36-Month Rule for Capital Gains Tax: What You Need to Know

The 36-month rule for Capital Gains Tax (CGT) was once a significant relief for homeowners, but recent changes have reduced its benefits.

This article explains how the rule works today and how it impacts property owners in the UK.

The United Kingdom introduced Capital Gains Tax (CGT) in 1965 under the Labour government of Harold Wilson, as part of a broader tax reform led by Chancellor James Callaghan. Before this, capital gains were largely untaxed, creating loopholes for the wealthy. The tax initially applied to gains on the disposal of assets above a certain threshold. Over time, various governments adjusted CGT rates and allowances. Notable changes include indexation relief (1982), taper relief (1998), and entrepreneur’s relief (2008). The system evolved to differentiate between individual and corporate gains, balancing investment incentives with tax fairness and revenue generation.

36-Month Rule for Capital Gains Tax

The 36-month rule previously allowed homeowners to avoid paying CGT on the last three years of ownership principal private residence, even if they had moved out. However, this rule has undergone significant changes:

These changes mean that those selling a property that is not their primary residence or main home may face higher CGT liabilities than before.

Deducting from CGT

You can reduce your CGT bill by deducting certain allowable expenses, such as:

• Stamp Duty Land Tax paid at the time of purchase.
• Estate agent and solicitor fees related to the sale.
• Improvement costs (but not routine maintenance).

Keeping thorough records of these expenses can help minimise your CGT liability.

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Capital Gains Tax Calculations

Capital Gains Tax on property is based on the profit made from selling it. Here’s a simple breakdown:

1. Work out your gain: (Sale price – Purchase price – Improvement costs)
2. Deduct your tax-free allowance: £3,000 for 2024/25.
3. Apply the CGT rate based on your income tax band:

Note: These rates apply only to residential property sales. Other asset sales may have different CGT rates.

Important: Keep detailed records of all improvements made to your property, as these can reduce your taxable gain.

What is Private Residence Relief?

Private Residence Relief (PRR) reduces or eliminates CGT if the property was your main home. If you have lived in the property for the entire period of ownership, no CGT is due when selling.

If you’ve lived in the property for part of one property during the ownership period, PRR covers:

• The time you lived in the property.
• The last 9 months of ownership (or 36 months if you qualify for an exemption).

Important: If you own multiple properties, you can nominate one as your main residence for tax purposes. This can be a useful tax planning strategy.

Do I Have to Pay CGT If I Sell My House and Buy Another?

If you sell your main home and buy another, you usually won’t have to pay CGT. However, if you:

• Let out part of your home
• Used it for business purposes

you may have to pay CGT on the portion of the property not used as your main home.

Letting Relief

Letting relief was previously a useful way for landlords to reduce CGT. However, since April 2020, it seems full relief only applies if the landlord shared the property with their tenant.

Important: If you’re planning to rent out your property, living in it first could help you benefit from PRR and letting relief.

How Long Do You Need to Live in a House to Avoid CGT?

There’s no fixed period to fully avoid CGT. However, the longer you live in the property as your only or main residence, the more relief you’ll receive.

Important: Set a reminder when agreeing to sell your property to avoid missing the deadline.

What Happens If You Inherit a Property?

If you inherit a property, CGT is only due when you sell it, not when you inherit it. The taxable gain is calculated based on the property’s market value at the date of inheritance, rather than more than one property at its original purchase price. This is known as the probate value. If you decide to sell, it’s worth getting an up-to-date valuation to ensure accurate tax calculations.

Additionally, suppose you decide to rent out an inherited property before selling. In that case, you may become liable for CGT on any capital gains accrued from the date of inheritance to the sale date. However, some expenses, such as legal fees and improvements to a dwelling house, can still be deducted.

How Does CGT Apply to Second Homes and Holiday Properties?

If you own a second home or a holiday property that has never been your main residence, you will likely face CGT when selling it. Unlike main residences, second homes do not qualify for Private Residence Relief, and you will be taxed on the entire capital gain. The same tax bands (18% for basic rate taxpayers and 28% for higher rate taxpayers) apply. Careful planning, such as timing the sale strategically to fall within a lower income tax year, can help reduce CGT tax liability though

Conclusion

The 36-month rule for CGT has changed significantly over the years, with the exemption period now reduced to just 9 months for most sellers. If you’re selling a property that is not your main home, it’s essential to understand the tax implications and seek professional advice where necessary.

Tax rules can change frequently, so always check the latest guidance or speak with a tax professional before making major financial decisions.

House Buy Fast solution as an alternative

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Important: This is not financial advice, contact professionals before making a decision.