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What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax you pay when you sell something that has increased in value during the time you’ve owned it. You have to pay it on things like stocks, property, or valuable antiques.

With a couple of exceptions, you only have to pay CGT if you’re selling a property that you don’t live in - for example a buy to let property, or a holiday home.

If you’re a UK resident, you’ll also have to pay capital gains taxes when you sell a property in another country.

How much is Capital Gains Tax on property?

The Capital Gains Tax rate for property is slightly higher than the rate for other assets.

At the basic rate, tax on capital gains from property is 18%. At the higher rate it is 28%. Most people can earn £50,000 before they have to pay the higher rate of capital gains tax.

Note: In Scotland, Capital Gains Tax rates are calculated using UK tax rate thresholds rather than Scottish bands of income tax.

You only have to pay Capital Gains Tax on any profit (or ‘gain’) you make. To work out how much you’ll need to pay, subtract the amount you originally paid for your property from the price you sold it for. This will give you your ‘gain’.

You’re then allowed to deduct any reasonable costs associated with improving or selling the property. These includes things like: estate agent fees, conveyancing costs, and the Stamp Duty you paid when you originally bought the property. Deductions can’t, however, include things like mortgage interest or costs involved with property upkeep.

Everyone gets a tax free allowance each year too. For the 2020-2021 tax year, this allowance is £12,300.

This means that you will have to make a profit of at least £12,300.01 before you need to pay any CGT. This allowance has to be used in a single tax year, and doesn’t get carried forward if you don’t use it.

Remember: Any profit you make from selling a property is included when working out which rate you will pay your CGT. For example, if you earn £45,000, but then make a £30,000 profit on your property sale, you will be pushed into the higher tax rate bracket, and have to pay 28% on the amount above £50,000.

Other conditions to be aware of

There are a number of things that make calculating the actual amount you’ll need to pay in capital gains tax more difficult:

If your property was ever your main home, you can subtract the amount of time you lived there, from the amount you have to pay in capital gains tax.

  • For example, if you owned the house for 10 years, but rented it out for 5 years, you would only pay CGT on those five years.

  • You’ll also get tax relief for the final 9 months of ownership, regardless of whether you were living there or not.

You may need to pay Capital Gains Tax on a property even if it was your main home

  • You’ll be liable to pay some tax if you sell part of the garden, or if you own more than half a hectare (5000 square metres) of land.

  • You might also have to pay some Capital Gain Tax, if you moved out of the property over 18 months before your sale completes.

  • If you use part of your property solely for business use

  • If you bought the house for the sole purpose of renovating or developing it to sell for a profit

There are also special rules for calculating your Capital Gains Tax if you:

  • Live abroad

  • Sell a lease, or part of your land

  • Your property is compulsorily purchased

Make sure you speak to an independent financial advisor or experienced conveyancer when you sell your home. They will be able to provide advice tailored to your unique situation, including details of any tax relief you might be entitled to use.

Do I have to pay capital gains tax on an inherited property?

If someone leaves their house to you in their will, you will inherit the property at its market value at the time of their death.

If you don’t live in it before you sell, you’ll therefore pay your Capital Gains Tax on the difference between the sales price and the market value of the property on the date you inherited it (rather than the amount it was originally purchased for).

This is one of the reasons that it’s vital you get an accurate probate valuation.

We have more on selling inherited properties on our blog. Head there now.

If you’re unsure how much Capital Gains Tax you should be paying on your property sale, make sure you seek independent financial advice, so you’re not caught out with a surprise tax bill.

When do you pay Capital Gains Tax on property?

You’re legally expected to pay your Capital Gain Tax within 30 days of the ‘disposal’ of your property.

In UK the legal definition for ‘disposing’ of a house includes:

  • Gifting

  • Selling

  • Transferring

  • Receiving compensation for

  • Trading for another item

It used to be that you had until your normal return was due at the end of the tax year before you had to pay your CGT. However, on the 6th April 2020, the rules changed so that you now have to pay Capital Gains Tax on residential property within 30 days of the property sale or disposal. You can do this by submitting a ‘Residential Property Return’, and making a payment through the HMRC platform.

You will, however, still have until the end of the tax year to use up any remaining tax free allowance you might have.

Remember: Even if you don’t owe any Capital Gains Tax you are still required to submit a return. This may seem annoying at the time, but it can make it easier to offset any losses against a gain made from selling other assets in the future.

What happens if I don’t pay?

If you don’t declare and pay the correct amount of Capital Gains Tax, you’ll face the risk of prosecution, and large fines. At a minimum, you’ll be liable to pay both the amount you owe, and a fine of up to double the amount due.

Avoiding Capital Gains Tax on UK Property

Although you can’t completely avoid paying for Capital Gains Tax on properties that aren’t your main home, there are a few ways you can reduce the overall amount you have to pay.

  • Partner Allowance

Married couples / Civil Partners are able to combine their Capital Gains Tax free allowance. This year that would mean you are eligible for tax relief on any gain up to £24,600.

  • Unmarried Partners Nomination

Unmarried partners are allowed to nominate separate homes are their main residence. If you use and live in more than one home, you could each nominate a property, and they will both remain tax-free. You have two years from when you get a new home to make the nomination.

  • Offsetting Previous Losses

If you lost money when you sold another asset, you can use this to offset a future gain. For example if you have a property portfolio, and make a £35,000 loss on one property sale, you will then be eligible to an extra £35,000 tax free gain on top of your basic tax free allowance. You can claim losses via a self assessment tax return, or by calling HMRC directly.

  • Time your sale

If you’ve already used up some or all of your Capital Gains tax free allowance for a particular year, you might want to delay your property sale to the next tax year so you can use the tax relief again.