The Right to Buy scheme allows eligible council and housing association tenants to purchase their home at a discount below market value. When the time comes to sell, many former tenants are unsure how Capital Gains Tax applies. The short answer is: CGT is calculated on the gain from what you actually paid (the discounted price), not from market value at the time of purchase.
The base cost is the discounted price you paid
If you purchased your home through Right to Buy for £120,000 when the market value was £180,000, your base cost for CGT is £120,000. You are treated as having acquired the property for what you actually paid, plus acquisition costs (solicitor's fees, survey costs, SDLT if any applied).
The £60,000 discount is a genuine economic benefit and a genuine base cost. It is not treated as a gift to you by the council — it is simply the price you agreed. This means a larger proportion of any future gain is taxable compared to someone who bought the same property at market value.
Was it your main home?
Right to Buy properties are, by definition, properties that the buyer was living in as their main home at the time of purchase. Private Residence Relief (PRR) applies from the date of acquisition.
If you continued to live in the property as your main home and sell it without letting it or otherwise using it otherwise, the full gain is covered by PRR and there is no CGT to pay. In this case, no 60-day return is required.
If you moved out, let the property, or used it as a second home at any point, PRR covers the periods of occupation proportionally. The period of letting may have been eligible for lettings relief, though the rules were tightened significantly in April 2020. Under current rules, lettings relief only applies if you were living in the property at the same time as your tenants (shared occupation), which is rarely the case for former Right to Buy properties.
The covenants: selling early
Most Right to Buy purchases are subject to resale covenants. If you sell within five years of purchase, you are required to repay some or all of the discount to the landlord (the council or housing association). This repayment is a deduction from proceeds for CGT purposes, reducing the gain.
The repayment covenant is typically:
- 100% of discount if sold in year one
- 80% in year two
- 60% in year three
- 40% in year four
- 20% in year five
- Nothing after five years
If you sell within the covenant period and repay part of the discount, the net proceeds for CGT are reduced accordingly.
Example
You bought under Right to Buy for £120,000 (market value £180,000). You lived there for three years, then let it for five years, then sold for £250,000.
Base cost: £120,000 plus acquisition costs. PRR applies to 3/8ths of the gain (the three years of occupation as a proportion of eight years total). The remaining 5/8ths is the non-PRR period. The taxable gain is calculated on that proportion, less any enhancement costs and the annual exempt amount.
The 60-day return
If the property was not your main home throughout the full period of ownership — for example, because you let it after moving out — there may be a chargeable gain after PRR. The 60-day CGT return is then required within 60 days of completion.
If the property remained your main home throughout and is fully covered by PRR, no 60-day return is needed (assuming no other reason for a partial exemption).
What to do
Before agreeing a sale, it is worth understanding whether you are within the covenant period (which affects net proceeds), whether PRR covers the whole gain, and what the actual gain is after reliefs. If you have a chargeable gain and need to file a 60-day return, start at LetsFile. A Chartered Accountant/Chartered Tax Advisor calculates the PRR entitlement on your specific ownership history and files within 24 hours.