Taxes are a certainty in any walk of life, and there a number of them attached to the buying a selling of property. One of these can be Capital Gains Tax, which is applicable if you are selling a property that is not your home. It can sometimes be a difficult subject to understand but it is important that you know how it affects you before you come to sell a property so that you can plan for it and make the best decisions with this tax in mind.
What is Capital Gains Tax?
Capital Gains Tax is the tax that you pay when you make a profit on the sale of a property that is not your home. This could be a buy to let property, business premises, land, or a property that you have inherited. It is applicable if you sell the property or if you gift or exchange it if you are making a profit or gain from doing so.
The tax itself is calculated based on the profit that you make and not on the entire price that you are paid for the property.
When to pay Capital Gains Tax
Most people will be subject to private residence relief when they sell their main home, and so Capital Gains Tax is not an issue in this case. However, it will apply when selling any other property such as an investment or second home. It will also apply to your main residence if it contains a lot of addition buildings, you have sub-let part of it or you use part of it as business premises.
Capital Gains Tax also applies to assets that you gift to other people unless they are your husband, wife, civil partner, or a charity. You may not have to pay Capital Gains Tax on a property that was occupied by a dependent relative.
As a UK resident, you might think that Capital Gains Tax only applies to properties in this country, but that is not actually the case, and you will still be liable to pay it when you dispose of assets anywhere in the world. You will also be subject to Capital Gains Tax if you are not a UK resident but are carrying on a trade in this country.
If you inherit a property, then you may be subject to Inheritance Tax at the time of receiving it. You can also be liable to pay Capital Gains Tax, but this will not apply until the time at which you decide to sell the property. The gain will be calculated from the point at which you inherited the property and not from when it was first purchased by the original owner.
Capital Gains Tax rates
As with any tax, the rates and thresholds are subject to change. The moment, basic rate taxpayers can expect to pay 18% on the gains that they make when selling a property. If you are a higher rate taxpayer, then this amount goes up to 28%. You should also keep in mind that any Capital Gains Tax will be added to your other income when it comes to working out your income tax band for the year, and you may find yourself pushed into a higher tax bracket.
Capital Gains Tax Allowance
Any UK taxpayers have an annual Capital Gains Tax Allowance which allows you to earn a certain amount without having to pay tax on it. The tax will then only be applied once you exceed this amount and will only be payable on the amount that exceeds the allowance.
For the last couple of tax years, that allowance has been £12,300. This means that your property can be worth this much more than when you purchased it without you needing to pay tax on the profit.
If the property is owned by a couple, their allowances can be combined, meaning that a gain of £24,600 can be achieved before Capital Gains Tax needs to be applied. The 2023-24 tax year will see substantial cuts to this allowance, meaning that only £6000 per person will be available as a tax-free profit, and this will further decrease to £3000 in 2024-25.
Your Capital Gains Tax Allowance is only applicable for that tax year and can not be carried over to any other tax year if it has not been used.
Can I reduce my Capital Gains Tax?
Your Capital Gains Tax is calculated on the amount that your property has grown in value since you purchased it. However, there are ways that this can be minimised by deducting costs such as conveyancing fees, estate agent fees and stamp duty from the profit that you make. You can also take the costs of improving the property into account, such as building an extension, although the costs of upkeep do not apply.
You can also offset losses that you make on other properties against the gain you make on another.
As you are able to enjoy a larger Capital Gains Tax Allowance as part of a couple, you may want to consider joint ownership of a property with your husband or wife.
The timing of your sale is also an important factor. If you have used some or all of your Capital Gains Tax Allowance for this tax year, it may be prudent to hold off selling your property until the next tax year when you can make the most of a full allowance.
It is also possible to nominate the property as your main residence, but there are some strict rules which apply around this. If you have ever lived in a property at the same time as letting it out to tenants, then Letting Relief might be available.
Capital Gains Tax can take some calculating, and it is important to speak to an independent financial adviser to properly calculate what applies to you, how much you are likely to be required to pay and what steps you can take to minimise this bill.
Contact Us for Expert Advice on Capital Gains Tax
Our team of Capital Gains Tax Accountants are here to help you navigate the complexities of capital gains tax and property investments. Contact us today to schedule a consultation and take the first step towards maximising your investment returns.
Alistair Allcock
Alistair AllcockAli has a wide range of experience within the accounts and audit areas, drawing on his experiences from working for both large and mid-tiered practices. Find out more about Ali here.