Capital Gains Tax when selling a home
Will you have to pay capital gains tax when selling a home or other property? The short answer is, it depends. Read on to find out if you’ll have to pay capital gains tax, and if this is the case, how you might be able to reduce your tax bill. We also look at changes the government may be making in the future.
What is capital gains tax and when do I pay it?
Capital gains tax (CGT) is payable when you sell an asset that has increased in value since you bought it.
The rate varies based on a number of factors, such as your income and size of gain. Capital gains tax on residential property may be 18% or 28% of the gain (not the total sale price).
Usually, when you sell your main home (or only home) you don’t have to pay any capital gains tax (CGT). However, in some circumstances you may have to pay some. For example:
- The home includes a lot of land/additional buildings (5000 square metres or more)
- You’ve sub-let part of it (but having one lodger doesn’t count)
- Part of your home is exclusively business premises
- You bought it just to make a gain (e.g. if you are a property developer)
- You have another home that could be considered your main residence
Some of these points may be open to interpretation and dispute, so if you are in any doubt it is sensible to seek advice. An independent financial/ tax adviser can give you their unbiased view on whether your home will be exempt from CGT.
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What is the capital gains tax allowance?
You only have to pay capital gains tax (CGT) on gains that exceed your annual allowance. The tax-free allowance is currently £12,300 per person in 2021-2022, the same as it was in 2020-2021 (or £12,000 in 2019-20). This means your property can increase by this amount before any CGT will be payable on the sale. Any amount above this will incur CGT property rates.
Do I pay capital gains tax on my second home?
Generally, yes. If HMRC decides that a property isn’t your main residence, you will have to pay capital gains tax (CGT) on any gain in its value above your CGT allowance.
Do I pay capital gains tax on buy-to-let property?
Generally, yes. If your buy-to-let property has risen in value by more than your capital gains tax allowance by the time you sell it, you’ll have tax to pay.
Do I have to pay capital gains tax on inherited or gifted property?
If you give a property to your spouse or civil partner, or to a charity, there won’t be any CGT to pay.
If you inherit a property (and any inheritance tax due has been paid by the estate) then there won’t be any further tax to pay until you sell the property. The gain will be measured from the date at which you acquired the property.
If you sell a property that was occupied by a dependent relative, then you may not have to pay CGT. Ask your adviser about this.
How do I calculate my capital gains tax bill?
Working out exactly how much capital gains tax (CGT) you have to pay means doing a few sums.
If you’re a higher-rate taxpayer, it’s quite simple. Just subtract your CGT allowance from your gain, and your bill will be 28% of the remainder.
If you’re a basic-rate taxpayer, it’s a bit trickier. You’ll need to work out if your gain-minus-allowance will lift your income into the higher-rate band. Everything above the band will be taxed at 28%, while everything below it will be taxed at 20%. Your adviser can help you calculate it accurately.
N.B. These figures are based on selling a residential property. Other assets may be calculated differently.
When do I have to pay my capital gains tax bill?
If you have capital gains in a particular tax year, you should apply to submit a tax return if you don’t do so already.
For property sold in the 2019-20 tax year, you’ll have until the next self-assessment tax deadline on 31 January 2021 to declare any profit made from the sale and pay the tax owed.
Since 6 April 2020, there have been changes to how customers declare and pay Capital Gains Tax. There is an online service to inform HMRC and pay the tax.
If you make a taxable capital gain from UK residential property, either as a landlord or second home owner, you will have to pay the tax owed within:
- 60 days of selling the property if the completion date was on or after 27 October 2021
- 30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021
How can I reduce my capital gains tax bill?
There are various ways you can minimise or even eliminate a capital gains tax bill.
1. Don’t forget your spouse’s allowance
Remember that everyone has a CGT allowance, so if you are the sole owner of a property, you can double your allowance by sharing ownership with your spouse.
2. Note the different CGT bands
Basic rate taxpayers pay lower CGT, so if you are higher-rated and your spouse isn’t, you could reduce your CGT bill by transferring all or part of the property into their name. Ask your adviser about the most efficient way to do this, to make best use of both your allowances.
3. Time your sale carefully
If you have used up some or all of your CGT allowance for a particular year, consider delaying the sale of your property to the next tax year.
4. Nominate the property as your main residence
If you own several properties and wish to sell one, you may be able to reduce or eliminate the CGT bill by nominating it as your main residence in advance. The rules on doing this are fairly strict, so talk to your adviser about how to do this properly.
5. Deduct certain buying and selling costs
It is possible to deduct some costs when working out your CGT bill including legal and estate agents’ fees, and stamp duty incurred when buying the property. Costs involved with improving assets, such as paying for an extension, can also be taken into account when working out your taxable gain. However, you’re not allowed to deduct costs involved with the upkeep of the property. You cannot deduct certain costs, like interest on a loan to buy your property.
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Possible changes to Capital Gains Tax in 2022
One of the areas the government has been looking to increase its tax collection from is capital gains. Although it is now clear Capital Gains Tax (CGT) and rates and allowances have avoided changes in 2021, they are still possible for the budget in 2022 or in future years.
Any future changes are likely to be heavily influenced by the Office of Tax Simplification’s (OTS) review into CGT. It forecast that in 2019/20 CGT would raise around £9.1bn, which is about 1.1% of all tax paid in the UK. So, it’s no wonder the Chancellor asked the Office of Tax Simplification (OTS) to review the tax as a means to raise government funds.
The OTS issued some recommendations in November 2020. For second homeowners and buy to let landlords, it’s worth noting that their 11 recommendations included:
- Aligning CGT rates to income tax rates. That means basic-rate taxpayers who pay 18% CGT on property, and higher-rate taxpayers who pay 28% on property, will be charged 20% and 40% respectively.
- Reducing CGT tax-free allowance. The OTS think most people are avoiding any tax liability by using up their CGT allowance every year. It, therefore, suggests the annual exempt amount of £12,300, should be reduced to between £2,000 and £4,000. The Government confirmed in the March 2021 Budget that the personal allowance for CGT will be frozen until 2026.