36 month rule capital gains tax UK

Capital Gains Tax (CGT) in the UK is a tax on the profit when you sell or dispose of an asset that has increased in value. This tax is applicable to individuals, trustees, and personal representatives but does not apply to companies, which pay Corporation Tax on their gains. The 36-month rule, specifically in the context of private residence relief, has significant implications for homeowners looking to sell their property.

Overview of Capital Gains Tax on Property

When you sell a property that is not your main home, you may be liable to pay CGT on the profit you make from the sale. The gain is the difference between the sale price and the property’s original purchase price, minus allowable expenses and reliefs.

Basic CGT Principles:
  • Annual Exempt Amount: Every individual has an annual exempt amount (£12,300 for the 2023/24 tax year), below which no CGT is payable.
  • Rates: The rate of CGT on residential property is 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.

Private Residence Relief

Private Residence Relief (PRR) is a relief that can exempt the gain on the sale of your main home from CGT. This relief is one of the most significant for homeowners, often ensuring that no CGT is due when selling your primary residence.

Key Points of PRR:
  • Main Residence: The property must have been your only or main home.
  • Period of Occupation: PRR applies to the period you lived in the property as your main home.

The 36-Month Rule

The 36-month rule is a historical provision in UK tax law that allowed homeowners to claim relief for the last 36 months of ownership of their property, even if they were not living in it during that period. This rule was particularly beneficial for those who moved out of their home before selling it.

Historical Context:
  • Original Provision: Initially, the rule was more generous, allowing the final 36 months of ownership to be exempt from CGT, regardless of how long the property had been empty or let out.
  • Changes in 2014: In April 2014, this rule was reduced to 18 months to target tax avoidance and reflect more realistic property sale timelines.

Current Rules and Exceptions

Although the general exemption period was reduced to 18 months, there are still circumstances where the 36-month rule applies:

For Disabled Individuals or Care Home Residents:
  • Extended Relief: For individuals who are disabled or moving into care homes, the exemption period remains at 36 months. This exception is to accommodate the potentially longer time required to sell a property due to the unique circumstances of the owner.
Letting Relief:
  • Letting Relief Interaction: Letting relief, which provides further CGT relief for properties that were the owner’s main residence and then let out, can also interplay with the 36-month rule. However, letting relief itself has undergone significant changes recently, limiting its application.

Detailed Analysis of the 36-Month Rule

Practical Application of the Rule

To understand how the 36-month rule works, let’s consider a practical example:

Example Scenario:
  • Purchase and Occupation: John buys a house in January 2010 for £200,000 and lives in it as his main residence.
  • Move Out: In January 2020, John moves out and buys another house, renting out the first property.
  • Sale: John sells the first property in January 2024 for £300,000.
Calculating the Gain:
  1. Total Ownership Period: 14 years (168 months).
  2. Period of Main Residence: 10 years (120 months).
  3. Final Period Exemption: 18 months.
  4. Chargeable Gain Calculation:
    • Gain: £300,000 (sale price) – £200,000 (purchase price) = £100,000.
    • PRR: 120 months (occupation) + 18 months (final period) = 138 months out of 168 months.
    • PRR Calculation: £100,000 x (138/168) = £82,142 exempt from CGT.
    • Chargeable Gain: £100,000 – £82,142 = £17,858.
CGT Liability:
  • Annual Exempt Amount: Assume John hasn’t used his annual exempt amount.
  • Taxable Gain: £17,858 – £12,300 = £5,558.
  • CGT Rate: If John is a higher-rate taxpayer, the rate is 28%.
  • CGT Payable: £5,558 x 28% = £1,556.24.

This example illustrates how the final period exemption (18 months) helps reduce the CGT liability significantly.

Extended 36-Month Rule for Special Cases

For individuals qualifying under the special provisions (disabled or in care), the calculation extends the final period exemption to 36 months:

Example with Extended Exemption:
  • Final Period Exemption: 36 months.
  • PRR Calculation:
    • PRR: 120 months (occupation) + 36 months (final period) = 156 months out of 168 months.
    • PRR Calculation: £100,000 x (156/168) = £92,857 exempt from CGT.
    • Chargeable Gain: £100,000 – £92,857 = £7,143.
CGT Liability:
  • Taxable Gain: £7,143 – £12,300 = £0 (no CGT payable as gain is below the annual exempt amount).

In this scenario, the extended final period exemption completely eliminates John’s CGT liability.

Strategic Considerations

Homeowners and property investors need to consider the 36-month rule and other relevant CGT reliefs when planning property sales. Strategic considerations include:

Timing of Sale

  • Maximizing PRR: Aim to sell the property within the final period exemption to maximize PRR.
  • Market Conditions: Consider the real estate market conditions to optimize sale proceeds.

Main Residence Election

  • Multiple Properties: If you own multiple properties, you can elect which property should be treated as your main residence for CGT purposes. This election can be changed, typically once every two years, allowing strategic use of PRR.

Interaction with Letting Relief

  • Qualifying Periods: Letting relief can apply if the property was let out after being the main residence, potentially reducing CGT further. However, recent changes have limited its application to only periods where the owner was in shared occupancy with the tenant.

Recent Changes and Future Outlook

Recent Changes

  • Reduction to 18 Months: The reduction of the final period exemption from 36 to 18 months reflects efforts to tighten tax reliefs and align them with actual property sale times.
  • Letting Relief Changes: Restrictions on letting relief mean it now only applies when the owner lives in the property with the tenant, significantly narrowing its application.

Future Outlook

  • Policy Adjustments: Future changes to CGT rules and reliefs are possible, driven by economic conditions and policy priorities. Keeping abreast of tax legislation changes is crucial for effective planning.


Understanding the 36-month rule and its implications within the broader context of CGT in the UK is essential for homeowners and property investors. By strategically leveraging this rule, along with other reliefs such as PRR and letting relief, individuals can minimize their CGT liability. The careful timing of property sales, main residence elections, and staying informed about tax law changes are key to optimizing tax outcomes. While the reduction to 18 months has tightened the relief, the extended 36-month period for special cases continues to provide valuable tax planning opportunities.

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