What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit you make when selling or disposing of an asset (in this case a property) that has increased in value since you first bought it. It’s important to note that it’s the profit or “gain” you make that is taxed and not the overall money received. You do not pay CGT when selling your main home or when gifting the property to a spouse, civil partner or charity.
The rate will vary based on a number of factors, such as your income and amount of profit. For residential property, it could be 18% or 28% of the gain, not the total sale price. A key point to note is that you only have to pay CGT on your gains that are above your tax-free allowance. The current CGT tax-free allowance is £12,000 but this could change in the future so it’s important to keep up-to-date.
When selling assets like a buy-to-let property or a second home, you’ll likely have to pay CGT on the profit you make. However, how much you pay depends on a variety of factors. Compare My Move have created this guide to provide you with all the information you need about capital gains tax and whether you’ll have to pay it when selling your property.
When is Capital Gains Tax Due?
If you currently owe capital gains tax due to selling a property, you’ll have to wait until the next self-assessment tax deadline to report it and pay the tax you owe. The deadline will be on the 31st of January after the end of the tax year the sale took place. For example, if the sale was within the 2019-2020 tax year, you wouldn’t have to declare the capital gains tax owed until the 31st of January 2021.
The gain recorded will most likely be dated from the day you exchange contracts and not your completion date. These may fall in different tax years so it’s crucial to record everything. Again, you do not usually pay CGT when you sell your main home.
Changes in 2020: 30-day Payment Window from April Onwards
It was previously announced that from April 6th 2020, anyone who makes a taxable capital gain from UK residential property will have 30 days after the completion of the sale to pay the tax owed. This is a significant change and drastically lessens the amount of time you have to calculate and report the CGT. This 30-day payment window will only apply to UK residential property sold on or after April 6th 2020.
Do I Pay Capital Gains Tax on Property?
When selling some kinds of property in the UK, you may have to pay capital gains tax on the profit you make. You may need to pay CGT when selling second homes, buy-to-let properties, homes used primarily for business purposes or if you lease out part of the property you’re selling. There are a few situations where you will have to pay CGT when selling your main home.
When Will I Pay CGT on My Main Home?
Generally, you will not have to pay CGT when selling your primary home. If the property has been your main home, you won’t have to pay CGT for the time it was your main residence, plus the past 18 months of ownership. This can be raised to the past 36 months of ownership for those with a disability or for those who have moved into a care home. It’s important to note that this amount of time may be altered from 18 months to 9 months when the changes in April 2020 come into effect.
However, there are a few circumstances where you may be expected to pay CGT on your main home. These include:
- If you develop the property e.g. convert part of it into flats
- If you sublet part or all of your home. However, this does not include a single lodger.
- If you use part of your home exclusively for business purposes.
- If you moved out of the home 18 months ago or more
- If you bought the property to renovate and sell it on
- If you sell part of your garden and your total plot (including the area you're selling) is more than 1.2 acres
It’s not always simple to detect if you have to pay capital gains tax and so if you’re unsure, you should speak to an accountant or independent financial adviser for more information.
Capital Gains Tax Rates on UK Property
Gains from selling residential property have different tax-rates compared to other assets. The rates for capital gains tax is higher for property than other assets in the UK.
Basic-rate taxpayers will pay 18% on the gains they make when selling property in the UK. For other assets, this is only 10%. However, the percentage that basic-rate taxpayers pay can vary depending on the size of your gains and your taxable income.
For higher and additional rate taxpayers, you will have to pay 28% when selling residential property. For other assets, this goes down to 20%.
Changes to Private Residence Relief in 2020
If all of the following apply to you, you do not have to pay capital gains tax when you sell your home:
- you have one home and you’ve lived in it as your main home for all the time you’ve owned it (including the final 18 months of ownership)
- you have not let part of it out - not including having a single lodger
- you have not used part of it for business only
- the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
- you did not buy it just to make a profit
If these apply to you, you don’t have to pay CGT and you’ll automatically get a tax relief called Private Residence Relief.
However, in 2015, it was announced that changes will be made to private residence relief, taking effect as of April 2020. During this time, private residence relief will apply to the time you lived in the property, plus the final 9 months of ownership instead of the final 18 months. Those who have a disability or who have moved into a care home can still claim for the last 36 months of ownership.
These changes will also affect letting relief so that it’s only available to people who were in shared occupancy with the tenant. Those who lived in the property and rent it out will likely be faced with a larger CGT bill once the changes are put into place. However, you can still claim private residence relief for any period where the property was your main home.
The government may continue to consult these changes and so it’s important to keep up-to-date and to speak to an adviser if you’re ever unsure.
How Can I Reduce My Capital Gains Tax Bill?
You’re legally allowed to deduct certain costs from your gain when buying and selling a property. When calculating your CGT bill, you’re allowed to deduct costs like solicitors’ and estate agents’ fees and also stamp duty if you’re buying a house. The cost of improving the property, like adding an extension or other renovation, can also be taken into account.
Some of the costs you cannot deduct are general maintenance costs and mortgage interest.
As well as being able to deduct costs from your CGT bill, there are also ways to legally reduce it. These include:
- Including your spouse’s allowance - we each have a CGT allowance and so, if you share ownership of the property with your spouse, you can double your allowance.
- Timing the sale carefully - if you’ve used your annual allowance already, you may want to wait until the next tax year to sell your property.
- Considering the different CGT bands - if you’re a higher-rate taxpayer but your spouse is a basic-rate taxpayer, you could reduce your CGT by transferring all or part of the property into their names.
There are also other ways to reduce your CGT bill but each step has strict rules and must be done correctly. Talk to your advisor before making a decision so that you’re aware of how to legally complete the necessary steps. You can find an adviser through websites like Unbiased.
Will I Have To Pay Capital Gains Tax on a Buy-to-Let Property?
It’s possible, yes, as buy-to-let properties are subject to capital gains tax. If the buy-to-let property you’re selling has risen in value by more than your CGT allowance, then yes you will have to pay tax. The tax-free allowance is currently £12,000 per year, so you’ll need to pay CGT on profits above this limit. You should factor this cost in when you're taking out a buy-to-let mortgage.
Do I Pay Capital Gains Tax on My Second Home?
Yes. You don’t pay capital gains tax on your main residence, but you will have to pay CGT on a second home. When selling a second property, you’ll have to pay CGT as this is not your primary residence and so you’ll be taxed on the profit made.
Capital Gains Tax on Gifted and Inherited Homes
You won’t have to pay capital gains tax if you give a property to a spouse, civil partner or to a charity. This is because it’s deemed as a ‘no gain, no loss’ basis. However, if you gift it to another family member, a child perhaps, you’ll have to pay CGT on the gift. The amount you have to pay will be based on the difference between the current value of the house and the price you paid for it.
There is no CGT to pay on death. If you inherit a property and the inheritance tax has been paid by the estate, then there should be no further taxes to pay until you sell the property. If you sell the house without having made it your primary home, such as selling a probate property, you’ll likely have to pay CGT. The price will be determined by the increase in value between the date of death and the date you sell.
If you’re gifted a property whilst the owner is still living there, then this is called a gift with reservation. Inheritance tax will still have to be paid when the owner passes away and you may still need to pay CGT when you eventually sell the house. The amount you pay will depend on the increase in value between the date you were given the property and the date you sell. It does not include the date of death.
If you’re ever unsure, you should speak to an independent financial adviser who can provide you with the relevant information.
Other Taxes Due on UK Property
Other than capital gains tax, you will need to pay stamp duty when purchasing a property in the UK. There are different versions of this tax, with different names, applying to England and Northern Ireland, Scotland, and Wales.
The amount you pay is relative to the price of the house, with different rates for each proportion of a home’s cost. It will also depend on whether the house is your main home or a second property. To help you discover how much you’d have to pay, you can use our stamp duty calculator to get you started.
Another thing to consider when moving house is council tax. This is a type of tax on residential properties that your local council then uses to pay for services such as schools, rubbish collection, road repairs, policing, fire services and more. The amount you pay depends on a variety of factors like the size of your property and its location.
If you’re inheriting a house from a relative, there will most likely be an inheritance tax. If you’re considering renting out your property rather than selling, you will need to pay income tax on the rent you receive from the tenants.
Hiring a Conveyancer When Selling a Property
To help you further understand the legal payments required when selling a house, you must hire a qualified conveyancing solicitor to advise and inform you of the process. From exchanging contracts to paying stamp duty, your conveyancer will read through and check all contracts and documentation on your behalf as well as explain the conveyancing costs involved in the sale.
Whether you’re at the stage of hiring a conveyancer, property surveyor or removal company, you should always compare quotes to find the best company for you. Don’t forget to use Compare My Move to get connected with the best in the business, helping you save both time and money along the way.