Repossession is a distressing event, and the last thing most people in that situation want to think about is Capital Gains Tax. But repossession is a disposal for CGT purposes, and it is important to understand whether a CGT liability arises — or whether a loss can be claimed.
Repossession is a disposal
When a mortgage lender repossesses a property and sells it, you (the borrower) are treated as making the disposal when the lender sells it. Under TCGA 1992 s26, a lender exercising its power of sale acts as your nominee — so the lender's sale is deemed to be your disposal. Your proceeds for CGT are the actual sale price the lender achieves — not a notional market value, and not zero (even if you receive no cash, because the money goes to clear the mortgage).
The date of disposal is the date the lender completes the sale, not the date it takes possession. Taking possession is not itself a disposal — you remain the owner until the sale. (Market value would only be substituted if the sale were not at arm's length — for example, a sale to a connected party.)
When might there be a gain?
If you bought a property years ago and it has increased significantly in value, a gain may exist even if the lender repossesses and you receive nothing. The gain is the sale price the lender achieves minus your base cost (what you originally paid, plus costs).
This situation is more common for long-held buy-to-let properties where the owner fell into arrears but the property had appreciated considerably. The borrower can owe CGT on a transaction where they received no money at all.
Whether the 60-day return is required depends on whether there is a chargeable gain after reliefs and the annual exempt amount.
When might there be a loss?
If the sale price the lender achieves is below your original base cost, the result is a capital loss. (Negative equity alone — a sale price below the outstanding mortgage — does not by itself create a CGT loss; the loss depends on sale price versus base cost, not on the size of the mortgage.)
A capital loss on a UK residential property disposal can be used to offset gains on other property disposals in the same year, or carried forward to offset future gains. The loss is reported to HMRC (on the annual Self-Assessment return) and preserved until used.
A capital loss arising from repossession does not require a 60-day return — the 60-day obligation only applies where there is a chargeable gain, not a loss.
Private Residence Relief
If the repossessed property was your main home throughout the ownership period, PRR may cover the gain entirely. If you lived there for only part of the period (for example, you bought as a main home, then let it while renting elsewhere, then could not meet repayments), PRR applies proportionally plus the last nine months.
A property that was your main home when repossessed typically has full PRR for the period of occupation plus the final nine months. If the completion takes place within nine months of moving out, the entire ownership period may be covered.
The debt and the disposal
It is important to distinguish:
- The mortgage debt (what you owe the lender) — this is a separate matter from CGT
- The property disposal (the CGT event) — based on the sale price the lender achieves
The outstanding mortgage debt exceeding the property's value creates a personal financial liability (the lender may pursue a deficiency claim). This is separate from the CGT position. The CGT calculation does not reduce the gain by the outstanding mortgage.
Documenting the position
After a repossession, it is worth establishing:
- The sale price the lender achieved and the date of that sale (from the lender's completion statement or post-sale account)
- The original purchase price and costs
- Whether PRR or any other relief applies
- Whether the result is a gain (potential CGT and reporting obligation) or a loss (report to HMRC to preserve the loss)
If you have been through a repossession and are uncertain about the CGT position — whether a liability exists, or whether a loss can be claimed — contact LetsFile. A Chartered Accountant/Chartered Tax Advisor assesses the position and ensures any reporting obligations are met or losses are correctly preserved.