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What is Capital Gains Tax?
Capital Gains Tax is a tax you pay when you sell an asset that has increased in value during the time you’ve owned it. This includes things like stocks, property, or valuable antiques. The tax is only charged on the gains you make, rather than the amount you sell the asset for.
With a couple of exceptions, you only have to pay Capital Gains Tax on property that isn’t classified as your main residence. For example if you have a buy-to-let property, or you’re married and both of you own a house.
How much is it?
In order to work out how much you’ll need to pay in Capital Gains Tax, subtract the amount you originally paid for your property from the price you sold it for. From the result, deduct any costs such as: estate agent and conveyancing fees, the stamp duty land tax you paid when you bought the property, and any costs of improvements such as extensions. You’ll pay tax on the remaining sum.
‘Basic rate’ taxpayers will pay a capital gains tax of 18% when selling a UK property. Those on ‘higher’ or ‘additional’ rate will pay 28%. Most people can earn £50,000 before they have to pay the higher rate of capital gains tax. In Scotland, Capital Gains Tax rates are calculated using UK tax rate thresholds rather than Scottish bands of income tax.
Remember: Any profit you make from selling a property is included when working out which tax rate you will pay, and can push you into a higher tax bracket.
On top of this, there are also a number of conditions that can make calculating the amount of Capital Gains Tax you need to pay slightly more difficult.
Some of the more common conditions include:
If the property was your main home at any point during the time you owned it, you won’t need to pay Capital Gains Tax for the period you lived in it. You’ll also get tax relief for the last 18 months of ownership, regardless of whether you were living there or not. (From April 2020, this period will be reduced to the last 9 months of ownership.)
You may need to pay Capital Gains Tax even if a residence is your main home, if you’ve sold part of the garden, or your grounds are more than half a hectare.
Similarly if you moved out of the property over 18 months ago, there may be some tax due.
If you inherited a property, you’ll pay Capital Gains Tax on the difference between the sales price and the value of the property at the time of inheritance - rather than at the time it was originally purchased.
Resources such as those provided on Which? can be a useful starting point. But, if you’re unsure about how much Capital Gains Tax you should be paying, make sure to seek independent financial advice.
Read more about selling an inherited property.
When do you pay Capital Gains Tax?
From 6th April 2020, Capital Gains Tax on residential property is due 30 days after it’s sold. Within this 30 day period you’ll have to submit a ‘residential property return’ to HMRC detailing what capital gains tax is due - if any - and then pay the sum before the deadline.
If your property is sold before 6th April 2020, Capital Gains Tax is due to be paid when your normal tax return is due.
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 gains made from selling other assets in the future.
What happens if you don’t pay it?
If you don’t declare or 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.
How to reduce the amount of Capital Gains Tax you need to pay
In some cases you may be able to reduce the amount you need to pay in Capital Gains Tax by doing the following:
If you’re married or in a civil partnership, make sure that your assets are owned jointly. This means you will both be able to make use of your tax-free allowance, so that £24,000 (2019-2020) of any gain will be tax-free, rather than only £12,000.
Unmarried partners can each nominate a different property as their main home. This means you’ll then benefit from tax relief on both.
Remember it is possible to offset previous losses from selling assets from any gains. For example, if you have a property portfolio and made a loss selling one of your buy-to-let homes, you can deduct this loss from the gains you made selling your next buy-to-let property, before paying Capital Gains Tax.
Selling a UK property from abroad? Read more about the process here.
Ready to sell? Finding an estate agent is the first step. Compare top performing agents all across the UK here.
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