Capital gains tax: your obligations when you sell a property
Posted on 8th September 2022
Simply put, capital gains tax is the tax due on the sale of an asset that has increased in value since you originally owned it.
The gain you make is the amount that is liable to tax, not the full amount received from the sale of the asset, so for example, if you’re selling a property that you originally bought for £200,000 but is now worth £250,000, you’d only be paying tax on the £50,000 since that’s the increase in the property’s value.
What assets, other than property, are subject to capital gains tax?
Assets subject to capital gains tax include most personal possessions that are worth £6,000 or more, for example rental or investment properties, antiques, coins, stamps, jewellery, paintings, collectables and more. Note that your personal car and your main home are excluded from this tax.
You are not required to pay capital gains tax on any profit made from the sale of any ISAs, PEPs, Premium Bonds, UK government gifts, or betting, lottery, or pool winnings.
Assets not usually subject to tax include any gifts to your spouse, civil partner, or to a charity, your car (unless it has been used for business purposes), or any item with a lifespan of less than fifty years (again, unless it has been used for business purposes).
If you inherit an asset which you then choose to sell, for example a property of a deceased parent, inheritance tax is usually paid by the deceased person’s estate. If you choose to sell any assets that you have inherited, you will then need to calculate and pay capital gains tax on any profit made from this sale.
It’s worth noting that the sale of a property that is classed as a business asset may receive tax relief that can reduce or delay the amount of capital gains tax due.
Paying capital gains tax on a property
A property sale in this context is often called a ‘disposal’. This covers properties that are sold, gifted, or transferred to someone other than your husband, wife or civil partner.
The disposal of your main home or primary place of residence is not subject to capital gains tax, no matter how much profit you make from this sale. However, tax is due if you sell a premises, land or property that is not your main home, for example if you have let your property out to tenants, you have used it for business purposes, or it is your second or holiday home.
If you buy and sell properties as part of your business, for example if you are a property developer, then instead of capital gains tax, you pay income tax as a sole trader and corporation tax as a limited company. Special taxation rules apply for limited companies that dispose of a single residential property that is worth more than £2 million.
If you have sold a property other than your main home, you are legally obliged to include the property sale on your annual self-assessment tax return if you are required to complete one, as it is counted as personal income.
How to pay your property capital gains tax
To calculate your capital gains tax as a UK resident, firstly you need to assess whether the profit made on the property sale is above your tax-free allowance, known as the annual exempt amount. This is £12,300 for individuals, and £6,150 for trusts.
If the gain made is within your exemption allowance or if you make a loss on the sale, then no report is necessary.
If you are a UK resident selling a residential property that is liable to taxation, you must report and pay any Capital Gains Tax within 60 days of a property sale, using HMRC’s digital UK Property Service.
Note that if your property sale was completed before 27 October 2021, then the 60 day reporting period is reduced to 30 days, as the extension to 60 days for reporting and paying your capital gains tax was announced as part of the Autumn 2021 budget.
When living abroad, even if you’re a non-UK-resident for tax purposes, you are still required to pay tax on any gains made from selling land or property based in the UK.
If you fail to report and pay your owed amount of capital gains tax within the 30 or 60 day period, you will be subject to an automatic late filing penalty of £100, and further penalties will be applied both six and 12 months later if you do not file. Interest will also be applied to the amount owed, so it’s really important that you file within the reporting period!
If you are disposing of multiple properties in the same tax year, then a separate tax return must be made for each property sale unless the completion of contracts for the properties take place on the same day.
What are the capital gains tax rates on property?
If you’re a higher rate income tax payee, you will need to pay 28% on your gains from the sale of a residential property that is not your main home.
If you’re a basic rate income tax payee, the rate due will depend on the size of the gain made from the property sale.
You will need to follow these steps to calculate your annual Capital Gains Tax:
Work out how much annual taxable income you have made, this if your income minus your Personal Allowance and any other applicable Income Tax relief
Calculate your total taxable amount on the gain made from each asset, or your share of a jointly owned asset
Deduct any allowable losses and your tax-free allowance from your total taxable gains amount
Add this figure to your taxable income for that year
If this amount is within the basic income tax band, you will need to pay 18% on your gains from the sale of a residential property
We can advise on capital gains tax as well as direct you to other specialists and experts if you’re thinking about selling a property, or starting to invest in them. Do feel free to get in touch if you’d like to set up a time to speak about your specific circumstances!
Nicola J Sorrell - Effective Accounting
Founder | Xero Champion | IR35 Expert
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