Capital Gains tax is a type of tax you may have to pay when selling your home, but there are special rules in place for properties in the UK.
Don’t get caught out by an unexpected bill: learn everything you need to know about Capital Gains tax on the sale of properties in this article. We’ll cover key questions about where and when you have to pay it, what rate you’ll be taxed at, and how to minimise your tax bill with some simple steps.
Capital Gains tax is the tax paid on profit from your assets. The tax refers to money you make in profit from things like properties or shares in companies. This means if you buy a home for £100,000 and sell (or ‘dispose of’) it for £100,100, you’re only eligible to pay Capital Gains on the £100 you’ve made in profit.
Capital Gains tax on property sales mainly applies to:
You may have to pay Capital Gains tax if you own a single property and use part of it for business purposes, such as a home office or letting a room out. Working from home full-time (even as an employee) qualifies as ‘business usage’, while temporary or seasonal usage doesn’t.
If you do have to pay Capital Gains tax, you can take advantage of certain allowances to help minimise your bill. Read on to find out how.
HMRC sets Capital Gains tax rates on property sales at either 18% or 28%, depending on your income tax bracket: basic rate taxpayers pay the former rate while higher earners pay the latter.
Tax rates change over time, but the current rates are as follows:
|Income band||2021/2022 figures||Income tax rate||Capital gains tax rate|
|Personal Allowance||Up to £12,570||0%||0%|
|Basic rate||£12,571 to £50,270||20%||18%|
|Higher rate||£50,271 to £150,000||40%||28%|
|Additional rate||over £150,000||45%||28%|
Scottish sellers should use the Scottish thresholds for their personal income tax calculations and the UK thresholds (above) for capital gains tax calculations.
In 2021 the current Capital Gains tax allowance is £12,570 per person. CGT is only due on profits gains above your allowance.
The steps below are for private individuals and sole traders. Limited companies pay Capital Gains tax using their business’ corporation tax rate. If this applies to you, begin from step two and substitute the relevant tax value in step three.
Deduct your personal allowance (currently £12,570) from your annual employment or self-employment income. If you earn more than £125,140, you’re not entitled to a personal allowance.
Using the value you sold your property for, deduct the initial sales price you paid and costs with the sale (estate agent fees from purchase and sale, stamp duty, renovations, etc.). Mortgage interest or upkeep costs like decorating aren’t allowed. If you make a loss, you don’t have to pay Capital Gains tax as you’ve not gained anything to pay tax on.
Next, deduct your Capital Gains tax allowance (also known as the Annual Exempt Amount, currently £12,300). You only need to pay tax on the gains made above this latest figure, similar to your personal allowance. If your gains are lower than the allowance, you don’t have to pay Capital Gains tax.
Combine the figures from steps one and two and use this year’s income figures in the table above to determine which Capital Gains tax rate you fall into (18% or 28%).
Then, take the figure from step two and multiply it by the rate (0.18 or 0.28 as appropriate). If your gains abridge both bands, you’ll need to calculate the correct rate for each portion: 18% for the profits reaching £50,270 and 28% on those thereafter.
Gov.uk has a handy online Capital Gains calculator that you can use to determine your tax bill.
It takes 2 minutes. 100% free. No obligation.
Capital Gains taxes on residential properties are due within 30 days of the disposal. You'll need to submit a residential property return (enclosing key details like the price differences and expenses) and pay online.
Sellers used to be able to submit a tax return to inform HMRC of the sale, but this changed from 6th April 2020, meaning that some 2019-2020 Capital Gains tax payments may be outstanding.
Here are 6 ways you can avoid or minimise Capital Gains tax you pay when selling your property.
When calculating your capital gain (see step two above), remember to deduct all of your allowed expenses to accurately reflect the cost of selling your home. Otherwise, you’ll effectively pay twice: once for the costs and once again in tax.
Allowed expenses include any money you’ve invested in your property (like renovations), estate agent or solicitors’ fees from your initial purchase and sale, and your annual Capital Gains allowance.
You can also use the remaining allowances of your spouse or civil partner, potentially doubling your tax-free deductible in any one year.
Remember to only use the appropriate deduction amounts you each have remaining. The figures deducted need to match your personal tax records with HMRC even if the total value you record is correct between you both.
Tax years run from 6th to 5th April the following year. If you (or your spouse/partner) have used the majority of the Capital Gains allowance within a single year, you can delay your sale until after the end of the tax year.
Doing so will renew your Capital Gains allowance in full which you can use to reduce your tax bill.
If you’re unmarried, you and your partner can nominate separate properties as your main residences to HMRC.
However, you and your partner must live apart and update your home nomination within two years of moving into a new property together.
You’re entitled to private residence relief when selling your home for the time you lived there, including 9 months pre-sale (down from 18 months before 6th April 2020), even if you haven’t been living there at the time.
Additionally, you may be able to claim private residence relief on your portion of your property that you reside in if you let part of your home, and letting relief on the remainder.
If you’ve lost money when selling an asset (property or otherwise), you can offset your current or future tax bill by the same amount.
Losses can be claimed for up to four years, so check your previous accounts and see where you can make savings.
So how does Capital Gains tax work with second homes? The home you don’t apply private residence relief to will be eligible for the tax if it’s ever sold in the future. You can change which residence is eligible by updating HMRC.
You must update HMRC within 2 years every time your combination of homes changes. You can use the same link above to do so.
Unfortunately no, you can’t nominate a rental property to be your main residence. If you’re living in a rental property you own, it stops being a rental property when you occupy it.
However, if you lease part of your property, you can (partly) claim private residence relief on the portion of your property you own and letting relief on the remaining let portion.
This might sound like a silly question at first but it can be challenging in fringe cases.
Your main residence is the property you stay in full-time. Therefore, if you stay elsewhere at times (like a second or holiday home), you’ll need to pay a proportional level of Capital Gains tax if those assets are ever sold.
For example, if you owned a property for 10 years but only lived in it for 5, you’ll pay Capital Gains tax on 50% of the gains.
Capital Gains tax considers the time you spend living in the property as a home and what you use it for. You’re only allowed to nominate a single property as your main residence and claim private residence relief on it at any one time.
Gov.uk says if you have lived in your main home for the whole time you’ve owned it then you don’t need to pay Capital Gains tax.
In general when nominating a home to be your primary residence there is no rule on how long you need to have lived in it but most people recommend a least a year to avoid Capital Gains tax and get Private Residence Relief (PPR).
HMRC recognises that you may need temporarily to stay somewhere other than your main home and allows the following reasons for home absences:
You must have lived in the property before and afterwards (unless your work arrangements prevented you). If any of the above apply, you can claim private residence relief on these absent periods on your main property and avoid paying Capital gGins tax completely.
So far we’ve covered how Capital Gains tax works for main residence homes versus second homes and business properties like buy-to-lets, but do you pay it on inherited properties?
No, you don’t have to pay Capital Gains tax on properties you have gifted to a spouse or civil partner. This even extends to properties gifted to charity.
Tax will only be due when you sell the property if you make a profit and it’s a second home.
Don’t let Capital Gains tax be a hurdle to finding great property in your area. Whether you’re buying a second home or selling another, the tax doesn’t need to be complicated.
Make sure to speak with an independent financial advisor or conveyancer for more information. They’ll be able to provide tailored advice to your situation and identify tax relief you may be entitled to.
Use the article above to help guide your buying or selling process, and remember key costs like estate agent fees when calculating your capital gain.
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Yes you can deduct estate agent fees and other costs like legal/conveyancing fees, and Stamp Duty that you paid when buying the property.
You can deduct the following from Capital Gains tax calculations on your property:
You can’t deduct:
No you can’t. Taxes on individuals’ capital gains are on sales, not purchases, of property. You’ll need to pay your Capital Gains tax on your profits before spending them.
In contrast, businesses are able to claim business asset rollover relief, reinvesting profits on property sales and delaying Capital Gains taxes.
Both individuals and businesses can gift properties to their spouse or charities. However, spousal gifts only delay Capital gains taxes as they must use the original purchase price when calculating the total gain value to be taxed.
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