Capital Gains Tax on Property in the UK
For any estate and property owner – it’s important to understand the taxation behind, more specifically Capital Gains Tax on Property. As property values increase over time, many people find themselves with significant profits when they sell. However, those profits are often subject to capital gains tax, which can substantially reduce the amount of money you receive. If you’re considering selling a property, it’s important to understand how capital gains tax works and how to minimise its impact.
Capital Gains Tax (CGT) is a tax that is paid on the profit or gain that you make when you sell or dispose of an asset. If you own a property in the UK, you may be liable to pay CGT when you sell it. In this comprehensive guide, we will explain everything you need to know about CGT on property in the UK.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit you make when you sell an asset, such as a property or investment. It’s calculated based on the difference between the sale price of the asset and its original purchase price, which is known as the cost basis. If your cost basis is lower than the sale price, you’ve made a capital gain and will be subject to capital gains tax.
Who Pays For Capitals Gains Tax on Property in the UK
If you are a UK resident and you sell a property that is not your main residence, you may be liable to pay CGT on the gain you make. This includes buy-to-let properties, second homes, and holiday homes. If you sell your main residence, you will not usually have to pay CGT, as it is covered by Private Residence Relief.
Capital Gains Tax Rates for Property Sales
The amount of CGT you will pay on the sale of a property depends on several factors, including the sale price, the purchase price, and any costs associated with the sale. In general, you will be taxed on the gain you make, not the total amount you receive for the property.
The capital gains tax rates for property sales in the UK are determined by the amount of profit you make from the sale. As of the 2022/23 tax year, the CGT rates for individuals are as follows:
- If your total taxable income (including your capital gains) is less than £12,570, you won’t need to pay any CGT.
- If your total taxable income is between £12,571 and £50,270, you’ll pay a CGT rate of 10% on your property profits.
- If your total taxable income is above £50,271, you’ll pay a CGT rate of 20% on your property profits.
For example, let’s say you bought a property for £200,000 and sold it for £300,000, making a profit of £100,000. If your taxable income for the year is less than £12,570, you won’t need to pay any CGT. If your taxable income is between £12,571 and £50,270, you’ll pay a CGT rate of 10%, which means you’ll owe £10,000 in CGT. If your taxable income is above £50,271, you’ll pay a CGT rate of 20%, which means you’ll owe £20,000 in CGT.
Reducing Your Capital Gains Tax Liability
There are several ways to reduce the amount of CGT you will have to pay on the sale of a property, including:
- Claiming your CGT allowance – by making use of your CGT allowance, you can reduce the amount of gain that is subject to tax.
- Deducting allowable costs – any costs that you incur in relation to the sale of the property, such as estate agent fees, solicitor fees, and survey costs, can be deducted from the gain, reducing the amount of CGT you will have to pay.
- Transferring ownership to a spouse or civil partner – if you transfer ownership of the property to your spouse or civil partner, you may be able to take advantage of their CGT allowance, effectively doubling the amount of gain that is exempt from tax.
It’ always important to follow advice and guidance from a professional capital gains tax advisor to maximise you tax liabilities.
Reporting Capital Gains on Your Tax Return
If you need to pay CGT on your property sale, you’ll need to report the sale and pay the tax to HM Revenue and Customs (HMRC). You can do this online using the UK Property Disposals service. You’ll need to register for a CGT account and fill out the necessary forms to report your sale and calculate your CGT liability.
We highly recommend visiting this gov article to help learn more about creating a Capital Gains Tax on UK Property account
Should I Hire A Capital Gains Tax Accountant?
If you are considering selling a property and are unsure about your tax obligations, it may be wise to consider hiring a Capital Gains Tax (CGT) accountant. A CGT accountant can help you navigate the complex UK tax rules and regulations, and ensure that you comply with all the necessary tax laws. At MJ Kane, we specialise in UK tax and our team of capital gains tax accountants and advisors have the necessary expertise to help you with your capital gains tax on property.
Here are a few reasons why you might want to consider hiring one of our Capital Gains Tax accountants:
Our CGT accountants specialise in UK tax law and can provide expert guidance on how to minimise your tax liability. We are up-to-date with the latest tax laws and regulations, and can advise you on the most effective tax planning strategies.
Preparing tax returns can be time-consuming, especially if you’re not familiar with tax laws. Our CGT accountant can take care of all the paperwork and filing, saving you time and hassle.
Failing to comply with tax laws can result in costly penalties. A CGT accountant can help ensure that you meet all your tax obligations, reducing your risk of penalties.
At MJ Kane, we want to ensure you receive the most our of your sale, our CGT accountant can help you identify all the tax deductions and credits you are eligible for, which can help maximise your profits.
While hiring a CGT accountant may involve an additional expense, the benefits of working with a professional can often outweigh the cost. Before making a decision, it’s important to consider your unique situation and needs, and consult with a qualified tax professional to determine the best course of action for you.
Capital Gains Tax on Property FAQs
Do I Have to Pay Capital Gains Tax When Selling My Home?
When you sell your home in the UK, you may be subject to Capital Gains Tax (CGT) on any profit you make from the sale. However, in most cases, you will not need to pay CGT when you sell your main residence. This may fall under the main residence relief. If the property you’re selling is your main residence, you will typically be exempt from Capital Gains Tax. This relief applies to any property that you’ve lived in as your main residence for the entire time you’ve owned it.
Is There a Time Limit for Reinvesting in a New Property to Avoid Capital Gains Tax?
If you’re selling a property in the UK that’s subject to Capital Gains Tax (CGT), you may be able to defer or avoid paying CGT by reinvesting the proceeds in a new property. First, it’s worth noting that reinvesting in a new property won’t completely eliminate your CGT liability. Instead, it can defer the tax until you sell the new property in the future. This is known as “rollover relief.”
To be eligible for rollover relief, you must reinvest the proceeds of the sale into a new property within three years of the sale. The new property must also be used for a qualifying purpose, such as for rental or business purposes.
How is Capital Gains Tax Calculated for Inherited Property?
Capital Gains Tax (CGT) on inherited property in the UK is calculated differently than on other types of property. When you inherit a property, its value is typically based on the market value at the time of the previous owner’s death. This value is known as the “probate value.”
If you later sell the inherited property, the CGT is calculated based on the difference between the probate value and the sale price. This is known as the “gain.”
Do I Have to Pay Capital Gains Tax if I Sell My Rental Property?
If you sell a rental property that has increased in value since you acquired it, you may be subject to capital gains tax (CGT) in the UK. When calculating CGT on a rental property sale, you will need to determine the property’s market value at the time you acquired it, subtract any costs incurred when you acquired the property (such as legal fees), and subtract any allowable expenses (such as costs associated with repairs, improvements, and maintenance) and losses that you’ve made while owning the property. The remaining amount is your gain.
What Happens if I Can’t Pay my Capital Gains Tax?
If you can’t pay your capital gains tax (CGT), you may face penalties and interest charges from HM Revenue and Customs (HMRC). It’s important to pay your CGT on time to avoid these additional costs. If you can’t pay your CGT bill, you should contact HMRC as soon as possible to discuss your options.