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Selling or disposing of a property can be a daunting task, but it’s also an opportunity to make a profit. Understanding capital gains tax (CGT) is crucial for homeowners and investors. It is essential to help you plan your finances more effectively during the sale of what is likely to be your largest asset. This quick guide will walk you through the ins and outs of capital gains tax on property, providing some key points on rates, application and exemptions.
What is Capital Gains Tax?
Capital gains tax (CGT) is a tax levied on the profit or gain you make when you sell, give away, or otherwise dispose of something (an ‘asset’) that has increased in value. It’s not the amount of money you receive from the sale that’s taxed, but rather the gain you make. That is, the difference between what it cost you to acquire the asset and what you sold it for. This tax is a key consideration for anyone involved in the selling of assets, including properties, shares, and other investments.
The concept of capital gains tax is to ensure that individuals pay their fair share of taxes on the increase in value of their assets. Its a key part of the UK government tax receipts contributing to public finances. During 2022/23, it contributed almost £18bn to the government budget. That is nearly £620 per household!
The rate at which CGT is charged varies depending on several factors, including the type of asset sold, the seller’s income tax band, and any allowable deductions or reliefs that apply. See more above the rates charged below.
For property owners, CGT is particularly relevant. When you sell a property that has increased in value, you may be liable to pay tax on your gains. However, it’s important to note that not all properties will trigger a CGT liability. For example, your main home (your ‘principal private residence’) may be exempt from CGT due to Private Residence Relief, provided certain conditions are met. This relief can significantly reduce or even eliminate your CGT bill when selling your home.
Is Capital Gains Tax Payable on Property?
In the context of property, CGT applies to both residential and commercial properties, as well as to land. It includes properties in the UK and abroad if you’re a UK resident for tax purposes. Specific rules apply depending on whether the property was used as your main home, an investment property, a second home, or a business premises.
What are the Capital Gains Tax Rates for Property?
The rate of CGT you pay on property depends on your total taxable income and gains. For the 2024/2025 tax year:
- Basic-rate taxpayers pay 18% on their gains from residential property.
- Higher or additional-rate taxpayers pay 24% on their gains from residential property.
For gains from other types of property, such as commercial property or land, different rates may apply.
Calculation of Capital Gains Tax on Property
The basic formula for calculating the capital gains tax on property is relatively straightforward:
- Sale Price – This is the amount you sold your property for.
- Minus Purchase Cost – This includes the purchase price of the property. However, it also included any costs associated with buying it, such as solicitor fees, stamp duty, and survey fees.
- Minus Improvement Costs – Any money spent on enhancing the property’s value, such as extensions or major renovations, can be deducted. Routine maintenance and repair costs are not included.
- Minus Selling Costs – Costs incurred in selling the property, like estate agent fees and advertising, can also be deducted.
The result of this calculation gives you the ‘gain’. From this, you can subtract any available tax-free allowances (the Annual Exempt Amount) to determine the taxable gain.
Examples of Capital Gains Tax Calculations
To illustrate how capital gains tax on property is calculated, let’s look at a few examples. Suppose you bought a property for £200,000 and sold it for £300,000. After deducting allowable expenses of £20,000, your taxable gain is £80,000 (less any reliefs that are discussed further below).
Allowances and Reliefs
What Is My Capital Gains Tax Allowance?
All taxpayers are entitled to an annual Capital Gains Tax (CGT) allowance. This means they can earn a certain amount without paying any tax on it. For the 2024/25 tax year, this allowance was £3,000. If you jointly own a property with your spouse, you can combine your CGT allowances when you sell the property. This will effectively double the relief that you can claim. This allowance is deducted from the ‘gain’ to give you the ‘taxable gain’ for calculating your CGT liability.
Other Property CGT Reliefs
In addition to the Annual Exempt Amount, several reliefs can reduce your CGT on property:
- Private Residence Relief (PRR): This is one of the most significant reliefs for homeowners. If the property sold was your main residence for all or part of your ownership, you might be eligible for PRR. PRR can reduce or eliminate CGT on your gain. The amount of relief depends on the period the property was your main home and whether you let out part of the property.
- Lettings Relief: Previously, Lettings Relief provided additional relief for individuals who let out a property that was at some point their main residence. However, changes from April 2020 have restricted this relief only to situations where the homeowner shared occupancy with the tenant.
- Gift Hold-Over Relief: This applies when you give away a property. Rather than paying CGT at the time of the gift, the gain can be ‘held over’ until the recipient sells the property. This relief is particularly useful for estate planning and gifts to family members but requires both the giver and receiver to agree.
Some Further CGT Exemptions to Consider
Some additional tax provisions can significantly impact your CGT calculation and liability. For example, you need to consider any periods of absence or previous capital losses. These details may reduce your CGT liability further, as follows:
- Periods of Absence: There are specific rules for periods when you were not living in your main residence. In some cases, such as working abroad or if the property was your main residence before and after a period of absence, you may still qualify for full or partial PRR.
- Final Period Exemption: Even if you move out of your main residence, the last 9 months of ownership (as of the current tax rules) are always considered as if you were living in the property. This provides some leeway for owners who might have moved to a new home before selling their previous main residence.
- Capital Losses: If you’ve sold other assets at a loss, these capital losses can be offset against any capital gains, including gains from property sales, reducing your overall CGT liability.
Understanding these deductions and reliefs can significantly impact your capital gains tax calculation, potentially saving you a considerable amount of money. It’s advisable to keep detailed records of all purchases, sales, and improvements related to your property, as well as to consult with a tax professional to navigate the complexities of CGT and ensure you’re making the most of the reliefs and deductions available to you.
Reporting and Payment
In the UK, if you sell a residential property and have capital gains tax to pay, you must report and pay the tax within 60 days of the sale. This is done through the HM Revenue and Customs (HMRC) Capital Gains Tax on UK Property service. For other types of property, you may need to report it on your Self-Assessment tax return instead.
Conclusion
It is important for anyone planning to sell a property to understand how capital gains tax on property works. To comply with tax laws and potentially reduce your CGT liability, you should familiarise yourself with the process of calculating your gain, the available allowances and reliefs, the tax rates, and the reporting requirements. Seeking guidance from a professional is always advisable to navigate the complexities of CGT and ensure that you take advantage of all the allowances and reliefs that you are entitled to.
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