What is Capital Gains Tax?
Capital gains tax is the tax you must pay on any profit (gain) you make when you sell a property that is not your main home. Your gain is the difference between what you paid for the property and the amount you later sell it for.
You are also liable to capital gains tax if you dispose of a property in other ways, such as gifting or transferring it to someone else or exchanging it for another asset. In this instance, you will use the property’s market value in place of the sale price.
When do I have to pay Capital Gains Tax on a property?
Generally, you will not have to pay CGT tax when you sell your main home unless it has been used as a business premise or if you have let out all or part of your property (this does not include having a lodger if you are living at the property too).
However, you will have to pay CGT if you are selling a house or flat that you bought as a second property, such as a holiday home. You will also be liable to pay capital gains tax on any buy-to-let property, even if it is the only property you own.
What qualifies as my ‘main residence’ for Capital Gains Tax purposes?
If you have more than one property, you can nominate one to be tax-free. This doesn’t need to be the one where you spend most of your time. If you can, nominate the property you expect will make the largest gain when you come to sell it.
You have two years from when you get a new home to nominate it as your main residence.
Capital Gains Tax Allowance.
Fortunately, you do have an annual capital gains tax allowance. For the 2021 to 2022 tax year, the allowance is £12,300 (same as last year) (Frozen until 2026). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,600. This cannot be carried forward. In other words, if you don’t use it, you will lose it.
Capital Gains Tax Rates
You pay higher rates of capital gains tax on a property than on other types of assets. Basic-rate taxpayers currently pay 18% on any gains they make when selling property. Higher and additional-rate taxpayers currently pay 28%. The gov. UK website shows the income tax bands.
It is crucial to remember that any capital gains you make in the tax year will be included when working out your personal tax status for that year. This means that your gains from selling a property could push you into a higher tax bracket. The taxable gain is treated as the “top slice” of your income, so some of the gains can be taxed at 18%, with the rest a 28%.
How do I calculate my Capital Gains Tax liability?
You do not pay Capital Gains Tax on the entire sales value of the property, only on the amount that is counted as gains. You are permitted to deduct certain expenses from your gain to reduce your tax liability. These include estate agent’s fees, solicitor’s fees and the cost of any improvement work. You cannot deduct the costs of decorating or maintaining the property.
Gains = Purchase Price – (Sale Price + Buying & Selling Costs + Improvement Costs)
To calculate how much GCT you will need to pay, deduct your annual GCT allowance from your gains. You must pay Capital Gains Tax on this amount.
Add your capital gain to your taxable income to determine whether you pay the lower or higher rate of CGT.
GCT Payable = (Gains – GCT Allowance) x GCT Tax Rate
The government has provided an online capital gains tax calculator, which will help you assess your liability.
Capital Gains Tax changes from April 2020
New filing and payment obligations
From 6 April 2020, you need to report the gain to HMRC on a GCT return and pay the tax within 30 days of completion. Failure to pay within 30 days will result in penalties and interest charges.
Given the tight deadline, you’ll need to make sure you have gathered together all the relevant information required in advance. This includes:
- The date you acquired the property
- The costs of purchase and disposal. Including purchase price and sale price, stamp duty, estate agent fees from the sale, surveyors fees from the purchase, legal fees from the purchase and sale.
- Costs of eligible home improvements
- Your earning in the tax year
The tax due is an estimated amount at the time of the gain and could change if the person’s earnings change the tax bracket they fall into. The amount paid is treated as a payment on account and processed on the individual’s self-assessment tax return.
Most people are expected to submit their CGT return online via the HMRC’s government gateway. If you don’t have an account, you’ll need to apply for one. As this can take up to 10 days, make sure you have done this in advance of completing the sale.
Example
For a second home or buy to let property sold on 7 April 2021, the GCT return will need to be submitted and paid by 6 May 2021. The capital gains calculations will be included in the self-assessment tax return due by 31 January 2022. Should any further tax be payable or refund due, it will be calculated at this point. Any additional tax must be paid by 31 January 2022.
Changes to private residence relief
If you have lived in the property as your main residence for the entire period of ownership, private residence relief means that any gain you make is exempt from CGT.
Special rules govern partial private residence relief if you have lived in the property for some of the time. These rules changed in April 2020.
Before April 2020, if the property had been your home at some point in the 18 months before the sale this part of the gain would be exempt from tax. For sales on or after 6 April 2020, this relief period is reduced to 9 months.
This change affects people who are purchasing a home before selling their old one. They now have just nine months to sell their old property to avoid a potential CGT charge.
Changes to lettings relief
Under the old rules, if you sold a residential property that was once your main residence but had then been rented out, it was possible to deduct lettings relief of up to £40,000 from any capital gain.
However, from April 2020, lettings relief is now only available for people in shared occupancy with their tenant/tenants, so is no longer available to the vast majority of people.
Capital gains tax for UK non-residents
If you’re a non-resident selling a UK residential property, you only pay UK tax on the gain you’ve made since 5 April 2015.
If you inherit your second property
When you inherit an asset, inheritance tax is usually paid by the estate of the person who has died. You only have to work out if you need to pay capital gains tax if you later decide to sell the property.
Don’t pay twice!
Another thing to bear in mind is that capital gains are wiped out on death, so your estate will pay inheritance tax rather than CGT. Incurring CGT by selling assets later in life can effectively mean you pay tax on the same asset twice.
If in doubt, contact your financial adviser.
