CGT on the sale of a former holiday let property

CGT rates

As you’re probably aware, higher rates of capital gains tax (CGT) apply to taxable gains made by individuals on the sale of residential property. The rates are 18% and 28% respectively for basic and higher rate taxpayers.

BADR and property businesses

An exception to the higher CGT rates applies if a gain relates to business assets which qualify for business asset disposal relief (BADR). For this purpose furnished properties rented out as holiday accommodation (furnished holiday lets (FHLs)) count as business assets. A property must be let on certain terms and for minimum periods to qualify as an FHL. Where FHL status applies, gains relating to the sale of a property can qualify for BADR.

Non-qualifying property

In the scenario set out above the property ceased to be an FHL over two years ago and therefore it might seem that there would be no entitlement to the BADR 10% tax rate.

The BADR rate can apply where the previously qualifying asset, in this case a property, is sold within three years of the cessation of the holiday letting business. This means in our scenario BADR can apply to any gain from the sale.

No adjustment is required to account for periods (in this case the last two years or so) where the BADR conditions aren’t met

If the gain from the sale of the property occurs more than three years after the cessation of the FHL business, the higher 18% and 28% CGT rates apply to the whole gain. Remember, the date that a gain arises is the date the contract for sale is signed by the seller and the buyer. It’s not the completion date.

The end of an FHL business

In our scenario, the individual owned just one FHL qualifying property. That means the end of his FHL business was the date on which the qualifying conditions for the FHL ceased to apply.

Example. Rafiq bought an apartment in early 2010. Until Spring 2019 it was let on terms that meant it qualified as an FHL. Since then he’s let it less often and used it personally more frequently so that for more than three years the property has not been an FHL. Rafiq recently signed a contract to sell the property which will result in a capital gain. After deducting his annual exemption and CGT losses (if he has any to use) Rafiq will be taxable on the gain at 18% or 28% depending on how much income he has.

Can BADR be extended? If Rafiq owned another property simultaneously which also qualified as an FHL but which he didn’t sell, his property rental business would not have ceased with the sale of the apartment. As the tax rules say that all properties let by the same persons are treated as a single rental business, could this bring the gain on the apartment within the BADR time limit? Unfortunately not. FHLs are excluded from the usual rule which treats all let properties as part of a single business. Rafiq must sell the apartment within three years or lose entitled to BADR.