How To Tell HMRC About Selling Your Property

A House Near A Garden

For most people, the moment their home is sold, they feel some significant relief. After all, once the paperwork is done, you can move on with your life, right? What you may have forgotten, though, is the fact that when you sell a property in the UK, you may have to pay taxes, and that means telling the HMRC about selling your property in the first place.

Informing the HMRC

The major step you need to take is to let HMRC know that you’ve sold your property by submitting a Capital Gains Tax, or CGT, return. Your conveyancing solicitor will usually take care of this step for you, but if they don’t or you’ve sold your home in a private sale, it’s helpful to know how to do it on your own. The most effective way to tell HMRC about the property sale is by visiting the website and completing the Capital Gains Tax UK property disposal return form online. The HMRC website will ask you for the following property information:

  • Date when you first bought the property
  • Address and postcode
  • Date when the property was sold
  • Value of property when you first bought it
  • Value of property when you sold it
  • Costs associated with buying, selling, or making improvements to the property
  • How you lived at the property- the exact dates

Understanding the Taxes You May Face

The taxation that results from selling any residential property is called capital gain tax (CGT). Your CGT is payable when you sell a home that has increased its value since you first bought it. For example, if you purchased a home for £200,000 in 2012 and eight years later you sell it for £270,000, you will have to pay capital gains tax on £70,000. In general, in the UK, the CGT on the residential property varies from 18% to 28% of the gain (not the total sale price of the home).

In almost all cases, when you sell the home in which you have been permanently residing (or it is the only home you owe), you won’t owe CGT. Instead, CGT usually affects second homes or vacation properties. However, there are some exceptions to this rule, and they include the following:

  • Your home has huge acreage or additional structures (buildings) (usually at least 5,000 square metres).
  • Part of your home is a sublet (just renting out one room does not count). It usually requires subletting the entire ground floor, or each room is sublet to a different tenant.
  • Your property was for mixed-use. For sale homes with the mixed-used designation are those that have spaces for dedicated business purposes.
  • You only bought the home so that you could flip it and make a gain.
  • You bought the home only to rent it out to tourists (e.g., Airbnb)
  • You do not reside in this home permanently.

You may not know exactly whether your property meets any of the above criteria, so if that’s the case, you may want to speak with an accountant, tax advisor, or solicitor. A financial or legal professional may be able to guide you to help you understand whether your property is exempt from CGT.

There Are Some Allowances

There are some allowances when it comes to CGT. You’ll only be responsible for this tax if you make a profit that exceeds the annual allowance set by HMRC. The current tax-free allowance in 2021-2022 is £12,300 per person. What this means is that your property value must go above the allowance before you pay CGT. For example, if you bought a home for £200,000 and after eight years you sold it for £270,000, you will have to pay CGT on £70,000 minus the £12,300 allowance. However, the property must be valued accurately and honestly because HMRC will check the transaction at a later period. It is recommended that you get one or several professional valuators to provide you with the market value of your home.

In general, if you only have one residence where you reside permanently, there is no capital gains tax when you sell it. However, in most cases, if you own a second home, you almost always have to pay CGT when you sell it. HMRC usually states that if the property is not your permanent residence, then you will have to pay CGT on any gain in its value. Of course, you will be allowed to subtract the CGT allowance.

If You Must Pay Capital Gains

A UK resident who disposes of his/her property from Oct 27, 2021, will have 60 days from the date of completion to report the sale to HMRC and pay the CGT if there is a gain. If the completion date was before Oct 27, 2021, the deadline for reporting is 30 days. The rules for non-resident capital gains tax, though, are different. Capital Gains Tax for a UK non-resident means reporting sales or disposal of UK property regardless of whether they owe non-resident CGT within 60 days of completion of the transaction. CGT on non-residents runs at about the same rates, though.

How Much You Might Owe

Today, there are easy ways to figure out how much CGT you will be paying. For example, say you sell your cottage for £200,000, but when you bought it five years ago, it only cost £150,000. So you have made a profit/gain of £50,000.

To calculate the CGT, you subtract the annual CGT allowance from the gain, which is £50,000 minus £12,300 = £37,700.

The current CGT depends on whether you are a high-rate taxpayer or a low-rate taxpayer. The CGT rate for high-rate taxpayers is 28%, and for low-rate taxpayers, it is 18%.

So if you are a high-rate taxpayer, you will pay £37,700 x 28% as CGT, which is £10,556.

If you are a low-rate taxpayer, you will pay £37,700 x 18% as CGT, which is £6,786.

These numbers only apply to residential properties. There are slight variations in the calculations depending on the type of property (e.g., commercial, industrial, or mixed-use).

Lowering Your Capital Gains Tax Bill

There are several easy to lower your CGT bills, and they include the following:

  1. Your spouse also has a CGT allowance. Every adult in the UK is entitled to a CGT allowance. If you are married but with the home in your name only, then you may want to consider adding your spouse’s name to the title; by doubling the allowance limit, you also reduce the amount of the CGT bill. This needs to be carefully thought out in case your spouse decides to call it quits right after you place his or her name on the home title.
  2. In the UK, the basic rate taxpayers generally pay less CGT compared to the high-rated taxpayers. One way to reduce your high-rated taxpayer status is to decrease the number of assets you own. For example, if you are rated in the higher tax bracket and your spouse is not, then you can lower your CGT bill by transferring some or all of your assets to his/her name. Again, it is important to talk to a solicitor about how to do this so that there are no regrets later. The last thing you want is for your spouse to divorce you and go off with all your assets.
  3. You may want to adjust the timing of your sale. If you have used up your entire CGT allowance for the present year, perhaps you may want to consider a delay in selling the property until the next tax year.
  4. You could claim the property as your permanent residence. Since the main residence is not subject to CGT, one way to sell your home and not pay CGT is to claim it as your permanent residence. However, there are strict HMRC rules on what one can call a permanent residence. Consult with your accountant or solicitor; the strategy may not always work, but it is worth a try. Your job is to prove to HMRC that you have been living in that residence for at least two years.
  5. Consider deducting specific costs. Tax laws do allow you to deduct some costs when calculating your GST bill. Some of the costs that can be deducted include the realtor and lawyer fees. However, you are not permitted to deduct costs that involve the upkeep of the property, nor can you deduct the costs involved with a mortgage that was used to purchase the property. Speak to your accountant on this matter for more clarity.

Some 2022 CGT Changes You May Want to Note

With today’s changing economy, the government is considering shifting some CGT rates and allowances. The Office of Tax Simplification (OTS) is reviewing the CGT, and the following recommendations have been suggested:

  • Increasing CGT rates to align with income tax rates. What this means is that the basic rate taxpayer who currently pays 18% will now be charged 20%, and the higher rate taxpayers who now pay 28% will be charged 40%
  • There is word that OTS may reduce the CGT tax-free allowance from £12,300 to between £2,000 and £4,000.

These changes, however, have not become law yet, and it is possible they will not.

Failure in Reporting CGT on Residential Property Could Mean Penalties

When you sell a property in the UK you may be liable for CGT. Thus, the onus is on you to report the transaction to HMRC, and this must be done within a specific time limit. If you do not report the sale of your home to HMRC, this is known as a ‘failure to notify.’ Soon you will receive a letter from HMRC asking for details of the sale and whether you are subject to the CGT. Ignoring this letter can mean harsh monetary penalties.

Even if you believe that you do not have to pay CGT because you consider this your permanent home, you should first speak to your tax advisor or solicitor and still reply to HMRC about your concerns. If you do not communicate with HMRC, you can be faced with heavy penalties and surcharges. There is no harm in communicating with HMRC, and you can even do this online. There is a 60-day deadline for reporting the sale of a home, and failure to do so can result in a late filing penalty plus interest charges.

The best thing you can do is talk to your solicitor as soon as you sell your home to learn more about CGT and what your responsibilities may be.

FAQs

When is the capital gains tax due?

The date you pay and file CGT will depend on the date you sold your property. In general, the CGT payment is due before you file your annual tax return. For instance, if you sell your property between 1 January and 30 November, your payment is due by 15 December. Your return will be due by 31 October of the following year. Recently, though, HMRC changed the reporting and payment deadline from 30 days to 60 days for completion on or after 27 Oct 2021. What this means is that If disposal was on or after 27 Oct 2021 UK residents now have 60 days from the completion date to report and pay the CGT.

What is a Property Disposal?

You may have heard that you must pay Capital Gains Tax for UK property disposals. This is just another way of saying you have to file CGT returns any time you sell a property. Property disposal just refers to transferring, donating, or selling a property that you own. You typically only have to file a Capital Gains return if you sell the property. If you donate it, a Capital Gains Tax declaration usually isn’t necessary. You can submit a CGT return to HMRC online, just be sure you do it by the CGT return deadline, which is typically either 30 or 60 days depending on your situation. If you’re not sure you have to submit Capital Gains Tax returns because you disposed of the property in a very different way, it’s best to consult with a solicitor or tax professional to better understand what you might need to pay. The sooner you report Capital Gain on residential property, the more likely you are to get a true sense of what will be required from you. Given that there are penalties for not declaring Capital Gains Tax, it’s best to learn what you might owe as soon as possible.

What is the penalty for not paying capital gains tax in the UK?

The filing deadline for payment of CGT in the UK is within  60 days of the completion of the sale. If a return is filed more than 60 days following sale completion, it is considered late and you will have to pay a late filing penalty of £100. This fee quickly increases if the CGT is not paid within a few months.

What does 30-day CGT reporting mean?

You may hear the term 30 Day CGT reporting used. It’s a fairly simple term. It’s just a faster way to say 30-day Capital Gains Tax return. UK residents must file within 60 days of disposing of their property. This is known as the CGT 60-day reporting rule. CGT 30-day reporting, though, is required for purchases made before 26 Oct 2021. In those cases, the filing must be done within 30 days of completion.

What is the minimum amount of gain that is taxable?

If you are a UK resident and the gain after the sale of your property is more than £2,000, it must be reported. However, regardless of the gain, all sales of homes in the UK have to be registered with the Land Registry.

What is the CGT on property disposals?

The CGT rate on property disposals is between 18 and 28%.

Why is it important to report capital gains on residential property?

In today’s digital world, HMRC can very quickly find out about the sale of any property or land in the UK. HMRC has access to all land registry records and advertisements for home sales. Moreover, the agency has the legal power to check for bank transfers. In addition, if you had been renting your home, HMRC will note the change in rental income and assume you have sold the property. The agency also has access to records that can reveal if you have resided at the property and for how long.

What if I bought a property to sublet?

In general, anytime you buy a property to sublet it, and its property value increases more than the CGT allowance when you sell it, you will have to pay tax on it.

What if I give/gift my home to my children or spouse? Do they have to pay CGT?

If you give your home to your civil partner or spouse or your favourite charity, there generally is no CGT to pay. Furthermore, if you have allowed a dependent or disabled relative to stay on your property and then decide to sell it, there is generally no CGT to be paid. However, this also depends on how long you have allowed your relatives to stay and the value of the property.

Is CGT due on the inherited property?

If you have inherited a home, there is an inheritance tax usually paid from the deceased’s estate. However, you will have no additional taxation until you decide to sell the property. HMRC will determine the gain in value from the date you acquired the property on which the Capital Gains Tax return will be based.

When is Capital Gains Tax Due?

If you have sold a home this year and made a gain, then you need to pay CGT in the upcoming year’s tax filing. For example, if you sold a property in the 2020-2021 tax year, the next tax assessment period will be on Jan 31, 2022. At this time you need to reveal any gain made from the sale of your home and pay the CGT. There is also an online service that permits you to inform HMRC about the home sold and pay your taxes early.

For most homeowners who gain from selling a residential property in the UK, the CGT must be paid within 60 days. For example, if you sold the home on Oct 1, then you need to report to HMRC by Nov 30. You can pay by bank transfer, debit card, or corporate credit card. Another payment option is via the Government Gateway using the payment reference number stated on the confirmation page sent to you after you have made the report to HMRC.

The CGT for foreign residents and others is due within 60 days. Capital Gains Tax for non-residents doesn’t differ from that for residents. In the UK, CGT for a non-resident, though, is due much sooner. The non-resident capital gains tax in UK cities remains between 18 and 28 per cent. Capital Gains Tax returns, though, are due fairly quickly. In the UK, a “residents” definition is someone who has lived here for more than two years. The CGT for non-residents, though, also has to meet certain guidelines, so chat with a solicitor or financial advisor to learn more.

How long do I have to reside in my property to avoid capital gains tax in the UK?

While you do not have to pay CGT on the sale of your primary and permanent home, the requirement is that you must have lived there for a minimum of 2 years. Fortunately, these two years do not have to be consecutive.

When do I not need to pay GST following the sale of my home?

In general, you will not need to pay GST on gains following a home sale in the following circumstances:

  • If you have gifted the home to your spouse, civil partner, or your favourite charity or religious group.
  • If the home is considered a business asset, you may get some tax relief.
  • If you have offered to permit a dependent or disabled relative to occupy the home, you will not need to pay GCT when the home is sold for profit.

What records do I need to keep when I sell my home?

Any time you sell a home in the UK, it is highly recommended that you keep the documents in a safe place for at least 5-7 years. The reason is that HMRC does perform audits on people who sell their homes. So you need to keep the following documents:

  • When you first bought the home and its value
  • How long have you resided in the home- show evidence like mail letters, bills, property tax, etc
  • Information about when the home was sold
  • Data about the value of the home when it was sold
  • The amount of profit you made on the sale of your home

All communications with HMRC

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