Finding the amount of Capital Gains Tax (CGT) you owe can be complex. Not everyone is subject to CGT on UK property, but it's important to be aware that you might be liable for it. To avoid unexpected tax burdens, it's crucial to calculate your potential liabilities.
Understanding the calculation process can be challenging. In this guide, we will discuss the intricacies of CGT on UK property and equip you with the necessary knowledge when the time comes to sell your property.
First, let’s find out what capital gains tax is!
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What is Capital Gains Tax?
Capital gains tax (CGT) is a tax levied on the profits earned from selling certain assets, including property, that have been appreciated. When you sell an asset, CGT applies only to the gain or profit you have made rather than the entire sale amount.
For example, you bought an antique vase for £10,000 and sold it for £30,000. In this example, your profit amounts to £20,000, the taxable amount subject to CGT. However, certain deductions can be applied to this taxable amount, reducing the final CGT liability.
How Much is Capital Gains Tax on Property?
Determining the exact amount of Capital Gains Tax on property can be calculated by considering two key factors:
Profit from the Property Sale
The first factor is the profit or capital gains you have obtained from selling the property. To determine the profit, subtract the property's purchase price from the selling price.
Applicable CGT Rates
The second factor is the rates you will be charged CGT, which are determined based on your income. HMRC (Her Majesty's Revenue and Customs) considers your taxable gains and combines them with your income to determine the Income Tax band you fall into in the year of the property sale. Consequently, you will pay CGT at the appropriate rates on the taxable portion of your capital gain.
To calculate the CGT on your property:
- To calculate the taxable gain, subtract any eligible expenses and the CGT allowance from the overall profit.
- Consider your tax threshold, as it determines the specific rates you will pay CGT.
Property Capital Gains Tax Allowance
The Capital Gains Tax allowance on property for 2023-2024 is £6,000. This means the first £6,000 of your taxable gain from selling the property is exempt from CGT.
Continuing with the previous example:
- Total taxable gain or net profit: £300,000
- Taxable gains after deducting the allowance: £300,000 - £6,000 = £294,000
You don’t have to report or pay CGT if total taxable gains fall below the allowance.
CGT Payment and Rates: When to Pay and How Much?
You have to pay capital gains tax (CGT) when you sell a property that is not your home. However, certain criteria may also make paying CGT on your main home necessary.
If the property is large, has been used for business purposes, or has been rented out, avoiding CGT liability can be challenging. Also, the property's CGT rates are higher than those for other assets.
For individuals categorised as primary ratepayers, the CGT rate on assets is 10%. However, the same individual would face a CGT rate of 18% specifically for the property.
In both categories, there is a higher rate for additional-rate payers. If you're an additional-rate payer, you'll pay a 20% CGT rate on your assets. But if you're a higher-rate payer and own property, you'll pay a bigger 28% CGT rate.
Deductible Expenses: Lowering Your Taxable Gain
To calculate taxable gain, deduct costs related to property purchase and sale. These expenses include:
- Solicitor and estate agent fees
- Stamp duty paid during property acquisition
- Costs incurred for property improvements, such as extensions
It's important to note that general property maintenance expenses cannot be deducted. While not directly deductible from the taxable gain, mortgage interest can be considered to reduce the tax liability on rental income.
Example of Selling a Second Home
Suppose you sell a second home in England in the 2023-24 tax year. You bought a property for £120,000 ten years ago and are now selling it for £220,000. Let’s see how you can calculate it:
- Capital gain: £220,000 - £120,000 = £100,000.
- Deductible expenses: You incurred £5,000 in solicitor and estate agent fees. This reduces your gain to £95,000.
- Apply for the CGT allowance: With a £6,000 CGT allowance, the taxable part of your gain becomes £89,000.
- CGT rates: Assuming your other income is £25,000, you would pay 18% basic-rate CGT on £25,270 of your gain (£50,270 threshold), resulting in £4,548.60. The remaining £63,730 would be subject to a higher rate of 28%, resulting in £17,844.40.
- Total CGT bill: £4,548.60 + £17,844.40 = £22,393.
It's essential to consult with tax professionals or HMRC for precise calculations and stay informed about updated regulations. For more information on selling a buy-to-let property, additional guidance is available.
Capital Gains Tax on Inherited Property
Let’s see capital gains tax on inherited property or gifted property:
If you inherit a house from your parents or relatives through a will, you will get it at its current value. Capital gains tax (CGT) doesn't apply at the time of death. The home's value is included in the deceased's estate, which could be subject to inheritance tax based on their overall assets minus debts and funeral costs.
Selling an inherited property
CGT may be payable if you sell the inherited property without making it your own home. Property tax will be determined by comparing its value at the time of sale and the date of death. If the property has appreciated, a taxable gain will be calculated. You can deduct associated selling costs from the gain.
If you receive a property as a gift while the owner is still alive and residing there, it is a "gift with reservation." Inheritance tax calculations will still include the property's value upon the giver's death. If you sell the property, the taxable gain will be based on the increase in value from when you got it, not when the person who gave it to you died.
How Can You Reduce Capital Gains Tax on Property?
Consider the following strategies to reduce your capital gains tax (CGT) bill. However, it's highly recommended to seek advice from an accountant or financial adviser before implementing any actions:
Joint ownership with your spouse
If you jointly own the property with your spouse, you can effectively double your tax-free allowance by utilising both CGT allowances, which currently amount to £24,600.
Utilise lower CGT rates
If your spouse is a basic rate taxpayer while you are in a higher tax bracket, transferring the property into their name may result in a lower CGT liability, as the gains will be subject to a lower rate of 18%.
Timing the sale
If you have already utilised your annual CGT allowance, you can consider postponing the sale until after 5th April, which marks the start of a new tax year. This allows you to utilise a fresh CGT allowance for the next tax year.
Nominate the property as your main residence
If you own multiple homes, carefully consider which one you register as your main residence. The rules surrounding this determination are stringent, so consulting with your adviser is crucial to determine the most promising approach.
Ensure you deduct allowable expenses from your gain when calculating your CGT liability. This includes costs associated with buying and selling the property, which can help mitigate the overall tax burden.
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