Capital Gains Tax On Property When Selling

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When most people think about selling their homes, they only consider the freedom it will afford them. Whether they’re thinking of selling to move for work or they just want something different, the primary concern is often around getting it sold and moving forward. What most people don’t consider, though, are the fees that often come with selling a house. One of the most common fees is Capital Gains Taxes or CGT. What is CGT, and will you have to pay it on the house you’re working to sell right now? Are there ways around paying CGT? We’ll help you to understand this tax, who has to pay it, and just how much you might end up paying when you decide to sell your home.

What Is Capital Gains Tax?

Capital Gains Tax (sometimes called CGT) is the profit (capital gain) made when you sell any asset that has experienced an increase in value. While most people think about real estate when they think about CGT, that’s just not the case. Instead, in the UK, CGT is generally payable on the sale or transfer of assets such as property (except for your principal residence), stocks and shares, business assets, and certain personal possessions exceeding specified thresholds.

There are several reasons UK residents pay these taxes. Taxing capital gains ensures fairness and equity in the overall tax system. It helps to ensure that individuals who generate income from the appreciation of their assets contribute their share of tax, similar to those who earn income through other means, such as employment or business activities. Additionally, CGT is a significant revenue source for the UK government. The tax collected from capital gains funds various public services, infrastructure development, and government expenditures. It also helps control the country’s future. Capital gains tax can be used as an economic policy tool to influence investment decisions and asset allocation. By taxing capital gains, the government can incentivise or disincentivise certain types of investments, encourage long-term investment holding periods, and influence economic behaviour. It’s important to note that capital gains taxes aren’t just an invention of the UK government. Instead, many countries, including the UK, impose capital gains tax as a standard practice. This helps maintain consistency and aligns with international tax norms. It also helps prevent tax evasion and promotes cooperation among countries regarding the taxation of cross-border transactions.

The concept of taxing capital gains was first introduced in the UK with the Finance Act of 1965. Before that, gains on the disposal of assets were typically not subject to taxation. The introduction of CGT aimed to address the perceived inequity between income tax and gains made on the disposal of assets. When CGT was first implemented, it was a relatively simple tax with a flat rate. Initially, there were separate tax rates for individuals and companies. For individuals, the initial rate was 30%, while for companies, it was 35%. Over the years, the UK government introduced various reforms and changes to the CGT system. This started in 1988. The government introduced a new system with a two-tier rate structure at that point. The higher rate for individuals was set at 40%. In 2008, that changed again. The government introduced a single flat rate of 18% for individuals and 18% or 28% for certain gains made by companies. In 2010, they increased the top rate for individuals to 28%. In 2015, the government introduced new rules for non-residents selling UK residential property, bringing them within the CGT regime. Then, in 2020, changes to the reporting and payment of CGT on UK residential property sales were made, requiring a return and payment within 30 days of completion.

Who Has To Pay Capital Gains Taxes?

In the UK, capital gains tax (CGT) is generally payable by individuals, trustees, and personal representatives (e.g., executors) who make a capital gain from the sale or disposal of certain assets. The reality, though, is that most home sellers won’t pay CGT. Typically when you’re selling your primary home (or, for some people, the only one they own), you don’t pay CGT. Instead, you typically only pay this tax if you’re selling a second home that you own.

In the UK, CGT may apply when selling a buy-to-let property. Suppose the property has risen in value since you initially bought it. That increase in value exceeds your capital gains tax allowance (something we’ll talk more about in the next section). In that case, you can expect to pay CGT on the property.

CGT may also need to be paid if you inherit a property. This, though, is a bit trickier. If you give a property to your spouse or a charity, you don’t have to pay CGT. If you inherit it and keep it, you also won’t need to pay CGT. Once you decide to sell that property, though, you may be liable for CGT. The gain on the property begins the day you acquire it.

How Much Are Capital Gains Taxes?

Exactly how much might you owe when it comes to CGT? It depends a bit on the tax band that you’re already in. If you are a basic rate taxpayer, you’ll pay 18% on the portion of the gain that falls within the basic rate band. If you are a higher-rate taxpayer, you’ll pay 28% on the portion of the gain that falls within the higher rate or additional rate bands.

Capital Gains Are Often Listed On The Completion Statement

Understanding what you owe after you’ve sold your home isn’t as difficult as you might imagine. Instead, you can expect to receive a completion statement from your conveyancing solicitor. What is a completion statement? Completing statements are usually received between the exchange of contracts and the day of completion.

This complete statement helps to detail both the inputs of a home sale and the outgoings. Both the buyer and seller get completion statements.

While the completion statement typically lists exactly what your capital gains taxes will be, it lists much more than that. It will typically list the sale price of the home. It also usually lists the conveyancing fees you will be expected to pay once the sale of the home is complete. If you used an estate agency, those fees will typically be listed in the completion statement as well. Additionally, you’ll find the mortgage completion statement portion on your larger completion statement. Typically, this will list the redemption amount for your mortgage. Individual lenders may send you a separate statement, too. For example, Mortgage Works redemption statements are quite common for those who used that lender. The Mortgage Works redemption statement solicitors send out sometimes comes as part of the larger completion statement for the sale of property, and it sometimes comes as its redemption statement. A Leeds Building Society redemption statement solicitors send out also either comes as part of this completion statement or as a separate document if you use that lender. No matter where it comes from, lenders use the term redemption statement meaning what you’ll be required to pay them at the end of the sale.

Additionally, if you were part of a first-time buyer scheme, that will be part of your completion statement documents as well. For example, if you used Help to Buy, a redemption statement will be enclosed in the completion statement. Typically this is called a Help to Buy ISA closing statement, but it’s usually part of the same paperwork.

If there are early redemption charges on either, the lender will let you know through the redemption statement or the completion statement for the sale of the property.

You can typically find out exactly what you’ll need to pay well before that, though. You can simply use an HMLR fees calculator to determine what you might have to pay.

The Exemptions You Need To Consider

Not all sales require you to pay CGT, though. Instead, there are many different exemptions you can count on if you are selling a property on which you might have to pay CGT. One of the biggest is the Annual Exempt Amount, which applies to each individual in the UK. It’s their tax-free allowance from CGT. Currently, this amount is £12,300. Capital gains below this threshold are not subject to CGT.

The allowance applies to each individual separately, so if you are married or in a civil partnership, both you and your partner have separate Annual Exempt Amounts. This means you can potentially have double the tax-free allowance if you both have gains to offset.

When calculating your CGT liability, you subtract the total allowable losses and any applicable reliefs from your total gains. If the remaining gains exceed the Annual Exempt Amount, you would pay CGT on the excess amount.

Need a quick example? Imagine you made a capital gain of £20,000 from the sale of a recent rental property. The exemption amount is £12,300. You subtract that amount from the £20,000 you made on the sale. In this scenario, £7,700 of your capital gain falls above the Annual Exempt Amount. You would be liable to pay capital gains tax on this excess amount. The amount of tax payable depends on your tax bracket. Basic rate taxpayers would need to pay £1,386 in CGT. Higher rate taxpayers would pay £2,156.

The Annual Exempt Amount isn’t the only potential exemption. You may also be eligible for Principal Private Residence Relief. If a property is your main residence, you likely won’t have to pay CGT on the sale. This exempts you from paying CGT on the gains made when you sell your main home. The relief may also apply if you have a garden or grounds that are up to 0.5 hectares (1.2 acres) in size or if you have let out part of your home (under certain conditions). If the property was not your main residence for the entire ownership period, you may be eligible for proportional relief under this option. The gain will be apportioned between the periods of actual occupation, the final period, and any non-exempt periods. Only the gain relating to the non-exempt periods is potentially subject to CGT.

It’s also possible to be exempt from CGT, thanks to Lettings Relief. This relief can reduce the CGT liability on the portion of the gain relating to the let period. To be eligible for Lettings Relief, the following conditions generally need to be met:

  • The property must have been your main residence at some point during your ownership.
  • You must have let out part or all of the property during your ownership.
  • The property must qualify for PPR relief (Principal Private Residence Relief).

Lettings Relief is calculated based on either the amount of PPR relief you are eligible for or the amount of gain attributed to the let period. You will qualify based on the smaller number. The maximum amount of Lettings Relief that can be claimed is £40,000 per individual. This maximum applies across all qualifying properties. It’s important to note that the availability and conditions for Lettings Relief can be subject to change, and the specific circumstances of each case can also impact the relief amount. To ensure accurate information and determine your eligibility for Lettings Relief, you’ll want to consult with a tax professional or refer to the official HM Revenue and Customs (HMRC) guidelines.

Gift Holdover Relief may also be available to you. If you gift property to someone, CGT is not immediately payable. Instead, the gain may be “held over” to the recipient, and they will be liable for CGT when they eventually dispose of the property. This, however, comes with several restrictions. The transfer must be a genuine gift, meaning you do not receive any consideration or payment in return for the property. It also only postpones the payment of CGT. Instead of paying CGT at the time of the transfer, Gift Hold-Over Relief allows you to defer the payment of CGT. The relief effectively “holds over” the gain to the recipient of the property.

How Do You Avoid Capital Gains Taxes?

It’s typically not always possible to avoid paying Capital Gains Taxes in the UK. You may, however, be able to minimise what you’re required to pay considerably using these strategies.

  • Use Your Annual Exempt Amount: As we previously discussed, each individual has an annual tax-free allowance known as the Annual Exempt Amount. Currently, this amount is £12,300. By utilising this allowance effectively, you can offset gains up to this threshold without incurring any CGT liability.
  • Take Advantage of Reliefs: Explore various reliefs available, such as Principal Private Residence Relief (PPR) for your main home and Lettings Relief for properties that were your main residence but also let out for a period. These reliefs can significantly reduce or eliminate your CGT liability in specific situations.
  • Offset Capital Losses: Capital losses from other investments can be used to offset capital gains. If you have incurred losses in one investment, you can use those losses to reduce the taxable gain on another investment, thereby potentially reducing your CGT liability.
  • Plan Your Disposals: Timing the sale of assets strategically across tax years can help optimise your CGT liability. By spreading out disposals over multiple years, you can make use of the annual exemption each year and potentially stay within lower tax brackets.
  • Consider Tax-Efficient Investments: Some investment schemes offer tax incentives that can mitigate CGT liability. These schemes provide the potential for CGT exemptions or deferrals when reinvesting in qualifying startups or small businesses.

Are There Other Taxes You Have To Pay To Sell Your Property In The UK?

There are typically no additional taxes you will have to pay on the sale of your property. If you have been receiving rental income from the property, you would be liable to pay income tax on the rental earnings. The income tax rates and allowances depend on your overall income and tax bracket. It’s important to declare rental income to HM Revenue and Customs (HMRC) and include it in your annual tax return.

If you are buying a new property after selling this one, you may have another tax to pay as well – Stamp Duty Land Tax (or SDLT). SDLT is a tax paid by the buyer when purchasing a property. However, it’s worth noting that the rates and thresholds for SDLT are subject to change. The buyer is responsible for paying SDLT, and the amount depends on the purchase price of the property and various factors, such as whether it is a first-time purchase, second home, or buy-to-let property.

What’s The Best Way To Plan For Taxes On The Sale Of Your Property?

If you’re thinking of selling your house soon, there are several things you can do to help plan for those taxes. Planning for taxes on a property sale in the UK can help you optimise your financial position and minimise your tax liability. Here are some steps to consider when planning for taxes on a property sale:

  1. Understand Your Tax Obligations: Familiarise yourself with the tax rules and regulations related to property sales, including Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). Understand the current rates, thresholds, exemptions, and reliefs that may apply to your situation, as detailed in this blog post.
  2. Determine Your Tax Liability: Calculate your potential CGT liability by considering the selling price, acquisition cost (purchase price), and allowable expenses associated with the property. Factor in any reliefs or exemptions you may be eligible for, such as Principal Private Residence Relief (PPR) or Lettings Relief. Utilise the Annual Exempt Amount to offset gains up to the tax-free limit.
  3. Timing of the Sale: Consider the timing of the property sale to optimise your tax position. Spreading out the sale across different tax years can help you make use of multiple Annual Exempt Amounts and potentially stay within lower tax brackets. Additionally, be aware of any upcoming changes in tax rates or legislation that might affect your decision to sell.
  4. Utilise Tax-Efficient Accounts: If you have available tax-efficient accounts, such as Individual Savings Accounts (ISAs) or Self-Invested Personal Pensions (SIPPs), consider transferring funds or investments into these accounts before selling the property. Gains made within these accounts are generally tax-free.
  5. Consult with Professionals: Seek advice from a tax professional or accountant experienced in property transactions. They can provide personalised guidance based on your specific circumstances and help you identify potential tax-saving strategies.
  6. Consider Other Tax Implications: Assess the wider tax implications of the property sale, such as potential effects on your overall income tax position, Inheritance Tax (IHT), or any implications for other assets or investments. Ensure that you have considered all relevant tax aspects to make informed decisions.

Remember that there are regular updates to tax laws, so it’s essential to stay informed and up-to-date with the latest guidelines from HM Revenue and Customs (HMRC). By planning and seeking professional advice, you can make strategic decisions to minimise your tax liability while remaining compliant with tax regulations.

How Do You Pay Your Capital Gains Taxes?

If you know you’ll need to pay CGT, how do you pay them to the right people? It begins when you work with a professional to determine what you made on the sale. You can figure the gain made from the sale by subtracting the acquisition cost (purchase price) and any allowable expenses from the selling price. This will give you the taxable gain. Then you report the gain to HMRC. This is a very necessary step. You are required to report the gain to HMRC by completing the relevant sections of the Self Assessment tax return. If you don’t usually file a tax return, registering for Self Assessment is a must. Next, you’ll want to work with a professional to determine what you owe on that gain. Use the CGT calculation rules to determine the amount of tax you owe. The CGT rates depend on the type of property being sold (residential or non-residential) and your income tax bracket. Apply the appropriate rate to the taxable gain to calculate the CGT liability. Once you have calculated your CGT liability, you are responsible for paying the tax owed to HMRC. The deadline for payment is usually due by January 31, following the end of the tax year in which the property was sold. You can make the payment through various methods, including online banking, debit card, or by sending a cheque or postal order to HMRC. It’s important to use the correct reference number and ensure that the payment is made before the deadline to avoid any penalties or interest charges.

Be sure you maintain accurate records of the property sale, including contracts, invoices, and any relevant documentation. These records will be useful for calculating gains, completing tax returns, and in case of any future tax inquiries.

Always Consider Working With A Professional When It Comes To CGT

While it is not mandatory to use a tax professional to understand capital gains tax (CGT) in the UK, consulting with a tax professional can be highly beneficial. Tax professionals, such as accountants or tax advisors, have specialised knowledge and expertise in tax matters, including CGT. They stay up-to-date with the latest tax laws, regulations, and exemptions, ensuring that you receive accurate and current information. This means that a tax professional can assess your specific situation, taking into account factors such as your income, assets, allowances, and reliefs. They can offer individual advice for your circumstances, helping you understand the implications of CGT and any available strategies to minimise your tax liability. What’s more, though, is that a tax professional can assist in strategic tax planning. They can help you optimise your financial position, consider the timing of property sales, utilise reliefs and exemptions effectively, and structure transactions in a tax-efficient manner. This can result in potential tax savings and better overall financial outcomes.

It’s important to remember that CGT calculations and reporting can be complex, and errors can lead to penalties or incorrect tax payments. A tax professional can ensure accurate calculations, help you complete the necessary tax forms correctly, and ensure compliance with HM Revenue and Customs (HMRC) regulations.

Overall, engaging a tax professional can provide peace of mind, knowing that your tax affairs are handled by a qualified expert. They can help with your questions and concerns and guide you through the CGT process, reducing stress and uncertainty.

It’s important to choose a reputable tax professional with relevant experience in CGT and property transactions. They can provide valuable insights, maximise your tax efficiency, and help you make informed decisions regarding CGT in the UK.

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