Capital gains tax on property is one of the most complicated taxes in the UK.
To find out everything you need to know on this topic, carry on reading the information below:
About Capital Gains Tax on Property
The definition of capital gains tax, as outlined by HMRC, is that it’s a tax on any profits you earn when you get rid of an asset that’s gone up in value.
What’s very important to know is that it’s the money you gain that’s taxed, not the entire sum of cash that you get.
With regards to property, this means that you may have to pay capital gains tax when you sell a property for a profit.
However, things are a little bit trickier than saying everyone needs to pay this tax when selling their home for profits.
There are multiple other things to consider, such as your allowable costs, expenses, deductions, and the type of property you’re selling.
Can Capital Gains Tax Be Avoided or Minimised?
Contrary to what you might think, capital gains tax can be avoided and reduced.
To start, everyone gets a capital gains allowance of £11,700 per year.
In essence, this means you can earn profits on the sale of assets that are under this amount, and you won’t have to pay any tax on them.
Not only that, but you can also make deductions on specific costs revolving around your property when it comes to working out your capital gains tax bill.
Generally speaking, these are mainly to do with the expenses that occur when you buy or sell a home.
Some examples of costs you can deduct include:
- Solicitor or estate agent fees you pay during the sale.
- Stamp duty that you paid when buying the property.
- Home improvement costs.
Add up all your tax-deductible expenses, subtract this from the profit, and you may end up dipping underneath the yearly threshold, meaning you don’t have to pay capital gains tax.
Alternatively, it could transpire that your deductions still keep you above that threshold of £11,700, so tax still must be paid.
The difference is, you’ve now managed to minimise it quite substantially.
You may also be able to make other deductions depending on the type of property you’re selling and what it was used for before the sale.
But, we’ll touch on that as we explore the different scenarios in which you will or won’t have to pay CGT.
What Do You Pay Capital Gains Tax On?
In this section, we’ll look at all the different scenarios that can present themselves to an individual disposing of their property asset.
Here, you’ll see whether or not you might need to pay capital gains tax on property, depending on your situation.
Sale of property
As mentioned earlier, when you sell an asset, you have to pay CGT on the money you make from this sale.
In theory, you may believe this means everyone pays this tax when they sell their home.
On the contrary, it doesn’t always apply to people who are selling their main home.
If you’ve been living in your house for years, and you choose to sell it, then the chances are you’re going to make a profit thanks to the general market conditions getting better over the years.
But, as long as this is your primary source of residence – and you can prove this – then you’re exempt from paying capital gains on this asset.
If you own more than one property, then you will have to pay tax when selling it.
It’s crucial that you establish which of your properties is your main home by nominating it as such.
Then, you pay capital gains tax on your 2nd home – if you sell it for a total profit that’s greater than £11,700.
Please note that your total profit is inclusive of all expenses you’ve deducted from your home.
It’s common for someone to inherit a property when one of their family members sadly passes away.
If someone leaves their home to you in their will, does this mean you have to pay capital gains tax on it?
Things can be a bit tricky here as it all depends on when you inherited the property when you sell it, and how much you gain from it.
In essence, it’s very much a yes and no answer if you’re asking about capital gains tax on inheritance.
Yes, you will have to pay it if you sold this property for a profit that’s greater than your capital tax allowance.
No, you don’t have to pay capital tax on inheritance properties that were either made your primary residence or weren’t sold for a profit that’s greater than your allowable costs.
Property gifts are similar to inheritances in that someone gives you their property.
The difference between the two is that a gift comes before someone passes away.
For example, you and your spouse get married, and your parents gift you the old family home as a wedding present.
Again, you won’t have to pay capital gains tax on a property gifted to you if you live there full-time.
Similarly, if the profit generated from the sale is less than your CGT allowance, then no tax needs to be paid.
But, if someone gifts you their home, but still lives there – or you don’t use it as your main home – then the usual capital gains tax rules apply.
It’s important to note that with gifts and inheritance properties, profits are worked out based on the value of the home when you received it compared to when you sell it.
This means it doesn’t take into account how much the property was initially bought for.
On a similar note, if you’re the one gifting your property to a family member, then you don’t have to pay capital gains tax on it.
Paying capital gains tax on rental property means we move into pretty murky waters.
First of all, we need to go back to the idea of CGT and your main home.
If you’ve lived somewhere all your life, but rented part of the house out to someone else, then you will have to pay capital gains tax.
Naturally, if you don’t live in the property and are renting it out, then you have to pay CGT when you sell it as well.
However, you could receive some tax relief if you can prove that you lived in the property while renting out part of it to someone else.
Also, if you’re a landlord, you can’t make tax deductions on maintenance expenses, etc.
This is because you should already factor these into your income tax report every year.
Capital gains tax only applies when you sell your investment property for an overall profit above £11,700.
If you have an overseas asset, for example, a holiday home, then you may still have to pay capital gains tax.
This occurs when you consider the UK to be your permanent home, but you make capital gains from the sale of a property overseas.
In this scenario, the same capital gains rules apply as if you’re selling a second home.
But, if you’re a UK resident but consider your permanent home to be outside the UK, then you might not have to pay UK tax on your capital gains.
Here, you don’t have to pay tax if your gains are less than £2,000 in the tax year AND you can’t bring your assets into the UK – meaning you don’t transfer them to your UK bank account.
With commercial property, you may not have to pay capital gains tax all the time.
For example, people who buy and sell property for a living don’t pay this tax.
Instead, you pay income tax or corporation tax.
However, the general CGT rules apply if you’re selling a property that you live in but have used part of it for business use only.
Calculating Capital Gains Tax
Figuring out how much capital gains tax you pay can be tricky.
The obvious place to start is by figuring out if you made a profit when selling a property that requires CGT to be paid.
Do this by subtracting the value of the property when you bought it (or when it was gifted to you/you inherited it) from the value of the sale.
Next, take away any deductible costs from this number – including any losses you made when selling other assets – and you will be left with a sum of money that details whether or not you made a profit/loss.
If you’ve made a profit that’s over the CGT allowance of £11,700, then you have to pay the CGT rates.
As of right now, the capital gains tax rate on property is 18% for the basic-rate payer and 28% for higher or additional-rate payers.
Understandably, working out your CGT can be difficult, and you want to reduce it as much as possible.
If you need help with this, then contact us today as we can help minimise your capital gains tax, while providing further tax advice.Contact us