Capital Gains Tax on Property

Capital Gains Tax (CGT) is a tax that is payable on the sale of properties. Here is our guide to Capital Gains Tax on Property.

When do you need to pay Capital Gains Tax?

If you are selling a property in the UK, there is a chance you will have to pay CGT on the profits you make from the sale. However, it is important to note that this only applies to a second property and CGT will not need to be paid if you are selling your main home. CGT may also apply if your home is being used as business premises, have not lived in it for the entire period of ownership, or if you are leasing out a portion of the property.

What tax rate is CGT based on?

In the UK, basic rate taxpayers pay 18% on the gains they make when they are selling property. Higher rate taxpayers will pay 28%. It is important to note that capital gains will be added to other income sources when working out which income tax bracket you fall into. This can put you at risk of automatically pushing you into the higher bracket which you will need to factor into your financial planning.

To calculate how much CGT you will need to pay, you need to calculate the end profit you will be making on the sale of the property. To work out the gain, deduct the amount you originally paid for the property from the sale price you received when you sold it.

This however is not your final figure. You should also deduct any other costs that are directly involved in buying and selling a property. Things like stamp duty, estate agent’s fees, solicitors fees, and certain costs for improvements to the property (e.g. kitchen upgrade or extensions) can be offset against capital gains tax and reduce the final amount you have to pay tax on.

Not all direct costs can be deducted though, so you need to check which costs are applicable in your case. For example, mortgage interest payments cannot be deducted from the final amount.

CGT Allowance

The good news is that all taxpayers have an annual CGT allowance. This means that you can earn a certain amount without incurring tax. For 2022/2023, you will be able to earn up to £12,300 tax-free capital gains tax-free. Anything above this will incur a tax of either 18% or 28% depending on your tax band.

If the property is jointly owned, the couple is able to combine this allowance, meaning that £24,600 can be gained without incurring any CGT on it.

Whilst the individual has this CGT allowance, it is only valid for that, particularly tax year, and cannot be carried over to the next tax period. Once the tax year has ended, the CGT for that year will expire.

When is Capital gains tax due?

Once you have calculated how much CGT you owe, you will need to pay the tax owed within 60 days of the completion of the sale. This applies to all properties sold in the UK on or after 27th October 2021. This amount of time has been recently doubled in the latest October Budget, providing people longer to pay the amount as the previous 30 day deadline was seen as challenging to a lot of taxpayers.

You pay this tax by submitting a “residential property return” and making a payment on account.

Why is CGT not applicable on main homes?

In the majority of cases, you will not need to pay any CGT if you are selling a property that you live in as your main residence. This is due to the “private residence relief”. You will not need to pay CGT for the time the property was your main residence, plus the past nine months of ownership- even if you weren’t living in the property during these nine months.

Those with a disability or who have had to move into a care home can claim up to the past 36 months of ownership as opposed to just nine.

What counts as your main home?

If you use more than one property to reside in, you can nominate which property you will class as your main residence and this property will remain tax-free for CGT purposes. It doesn’t even have to necessarily be the home where you spend most of your time. As you can choose, it makes financial sense to nominate the home that you are expected to make the largest gain from if you were to sell. It is important to note that you have to make the nomination within 2 years of getting a new home.

Married couples and civil partners can only have one main home between them. If you are an unmarried couple, both can nominate a different house.

Are there any circumstances when you would have to pay on your main property?

There are some scenarios where you will still need to pay CGT

• If you develop your home (e.g convert part of it into flats)
• If you sell part or all of your garden and the total plot (including the section you are selling) is more than 1.2 acres in size
• If you use part of your home exclusively for business
• If you let out all or part of your home. However, this doesn’t include having a single lodger if you remain living at the property)
• If you bought a home to renovate and then sell it on.

Paying CGT on inherited or gifted homes

In some cases, relatives may want to leave their home to someone in their will. When they pass, the property will be inherited at the market value at the time of death. There is no CGT payable on death, however, the value of the home will be included in the overall value of the person’s estate. This figure is calculated by the total of someone’s assets minus any debts and funeral expenses.

Inheritance tax may be applicable on the property depending on the value of the person’s estate. In addition to this, if the person who has inherited the house sells it on without making it their home, there could also be CGT to pay. This depends on the amount the property sells for. If the selling price is more than the value given at the time of death, there will be a taxable gain. You will however be able to deduct any associated selling costs.

There may also be some instances where a home is gifted to someone whilst the owner is still alive. This is called “a gift in reservation”. When this happens, the value of the property will still be included in inheritance tax calculations when the gift giver dies. When it comes to CGT, the taxable amount of CGT will depend on whether the property has increased in value between the date the property was given and the date of the gift giver’s death.

As this article suggests, there are a lot of different scenarios and considerations when it comes to Capital Gains Tax. Whether you are selling a property, thinking about the tax implications of purchasing a second home, or are considering gifting a home, our specialist property team are here to help.