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Capital Gains Tax On Property: Understanding Tax Implications When Selling Your Property
If you plan to sell a property in the UK, you may be wondering about capital gains tax (CGT). In this guide we will explain everything you need to know about capital gains tax on property , including when it applies, how to calculate it, and ways to reduce your tax liability. With this information to hand, you can better navigate the property-selling process and increase your profits.
Introduction to Capital Gains Tax on Property
What is Capital Gains Tax, and When Do I Pay It?
Capital gains tax on property is a complex subject that can be confusing for many people. It is important to understand that it is a tax on the profit made from selling an asset that has increased in value since it was purchased.
This tax applies to a wide range of assets, including property, stocks, and other investments. In the case of property, capital gains tax is applicable to the sale of second homes, buy-to-let properties, and properties that do not qualify for private residence relief.
The amount of capital gains tax that is payable depends on a number of factors, including the length of time the asset has been held, the amount of profit made, and the individual's tax bracket. It is important to seek professional advice when dealing with capital gains tax to ensure that you are fully compliant with the law and are not paying more tax than you need to.
Unlike income tax, CGT is not automatically deducted by the inland revenue and needs to be self-reported. There are so many different fiscal triggers, so it is important to be aware of what needs to be reported.
Selling Your Main Home: Private Residence Relief
In most cases, selling your main home (or only home) does not incur capital gains tax (CGT) due to private residence relief. However, there are some cases where you may be required to pay capital gains tax (CGT) when selling your main residence:
The property includes a significant amount of land or additional buildings (over 5,000 square meters).
You have sub-let part of the property (one lodger doesn't count).
Part of your home is exclusively used for business purposes.
You bought the property intending to make a gain (e.g. change of use, property developers, etc).
You have another home that could be considered your main residence.
If you're unsure whether your home qualifies for private residence relief, we would suggest that you consult an independent financial adviser or tax adviser for guidance.
Selling a Second Home or Buy-to-Let Property
When selling a second home or buy-to-let property, you will owe capital gains tax (CGT) on the profit above your yearly CGT allowance, after subtracting any deductions. This rule also applies to inherited or gifted properties, except for transfers between spouses or civil partners and gifts to charities.
What are the Capital Gains Tax Rates on Property: What You Need to Know
The rate of capital gains tax on property depends on your income tax bracket:
Basic rate taxpayers: 18% on gains (not the total sale price).
Higher and additional-rate taxpayers: 28% on gains.
Keep in mind that the capital gain will be added to your other income when determining your income tax bracket for the year, potentially pushing you into a higher bracket.
What is the Annual Capital Gains Tax Allowance
Every taxpayer has an annual CGT Tax-free allowance, which means you can earn a certain amount of profit tax-free. For the tax year 2023-24, the annual exemption amount will be reduced from £12,300 to £6,000 for individuals and personal representatives, and from £6,150 to £3,000 for most trustees. If your property's profit exceeds this amount, you'll be liable for capital gains tax at the appropriate rate.
Couples who jointly own assets can combine their allowances, potentially allowing a gain of £12,000 without paying CGT. Remember, unused allowances cannot be carried over to the next tax year.
Strategies to Minimise Your Capital Gains Tax Bill
There are several approaches to reducing or even eliminating your capital gains tax bill when selling a property:
Deduct eligible costs: Certain buying, selling, and improvement costs can be deducted when calculating your CGT bill. Examples include conveyancing fees, estate agents' fees, stamp duty, and the cost of property extensions.
Offset losses: If you've made a loss when selling other assets, you can offset that loss against the gains from selling a property to reduce your overall CGT liability.
Joint ownership: Share ownership with your spouse or civil partner to take advantage of both your CGT allowances.
Optimise CGT bands: Transfer all or part of the property to a spouse in a lower tax bracket to potentially reduce your CGT bill.
Time your sale carefully: If you've used up some or all of your CGT allowance for a particular year, consider delaying the sale of your property until the next tax year.
Nominate the property as your main residence: If you own multiple properties and wish to sell one, you may be able to reduce or eliminate the CGT bill by nominating it as your main residence in advance. Be sure to consult an adviser on the strict rules surrounding this process.
Letting Relief: If you have lived in your home at the same time as letting it to tenants, you might be able to claim Letting Relief, which can reduce your capital gains tax bill.
How to Calculate and Pay Capital Gains Tax Bill
To calculate your CGT bill, follow these steps:
Determine the gain: Subtract the amount you originally paid for the property from the sale price.
Deduct eligible costs and allowances: Include eligible buying, selling, and improvement costs, as well as your annual CGT allowance.
Apply the appropriate tax rate: Basic-rate taxpayers pay 18% on gains, while higher and additional-rate taxpayers pay 28%.
There are special rules for calculating your gain if: you live abroad, you sell a lease or part of your land, your property is compulsorily purchased or you are selling property from the estate of someone who has died. For further information on this please visit.
https://www.gov.uk/tax-sell-property/work-out-your-gain
Keep in mind that these calculations apply to residential property sales. Other assets may have different rules.
When it comes to paying your CGT bill, you must declare capital gains tax on your tax return. You will be required to submit a CGT PPD return within 60 days of completion. The CGT on property disposal (CGT PPD) return is made using an HMRC digital service. Failure to report the gains you make may result in interest and penalties.
Calculate Capital Gains Tax - CGT Calculator for UK Property
Alternatively you can use this Capital Gains Tax Calculator from Money Savings Expert to help estimate your CGT liability.
Selling Overseas Property
If you are a permanent resident in the UK and you sell a property abroad, you will still be liable for CGT on the profit made. However, the rules may differ if you are a UK resident but your permanent home is abroad. In such cases, you may be eligible for tax relief or exemptions, depending on the country in which you reside.
It is also important to note that if you sell a property abroad, you may have to pay tax in the country where the property is located. This is because most countries have their own tax laws and regulations, which may differ from those in the UK. However, relief may be available if you are taxed twice, which means that you won't have to pay tax twice on the same profit.
To avoid any confusion or complications, it is advisable to seek the advice of a tax professional who is well-versed in the tax laws of both the UK and the country where the property is located. They will be able to provide you with valuable guidance on how to minimise your tax liabilities and ensure that you comply with all the relevant tax laws and regulations.
Conclusion:
Navigating the complexities of capital gains tax on property can be challenging, but this comprehensive guide should give you a solid understanding of the key concepts and strategies. When in doubt, consult an independent financial or tax adviser to ensure you're making informed decisions and minimising your tax liability.
At Glanvilles Damant Limited, we understand that selling a property can be a complex and sometimes overwhelming process. This is why we believe that instructing an expert solicitor is a crucial step in ensuring a smooth transaction. Our team of experienced solicitors can help you navigate the intricacies of capital gains tax, as well as other legal aspects of selling a property. In addition, we will guide you through the entire process.
It may be that you will need to take independent tax advice from a financial advisor before entering into the sale but we can advise you of the next steps to take. By entrusting your property sale to Glanvilles Damant Limited, you can be confident that you will receive the professional support and expertise needed to achieve the best possible outcome.
