Need help with Capital Gains Tax? Don’t worry, we’ve got you covered. From what it is and when to pay it to how you can reduce your Capital Gains Tax bill, read on to find out more.
What is Capital Gains Tax (CGT)?
In the UK, Capital Gains Tax (CGT) is a tax you need to pay on the profit you make when you sell a property that’s not your main home. This can include:
a holiday home
a buy-to-let
a property you’ve inherited
Do you need to pay Capital Gains Tax if you sell your home?
You don’t normally need to pay Capital Gains Tax when you sell your main residence. Your property is exempt from CGT if you tick all the following boxes:- You’ve lived in your home the entire time you’ve owned it.
- You’ve never rented part or all of it out (you haven’t used part of your home exclusively for businesses purposes).
- The total grounds are 5,000 square metres or less.
When you need to pay Capital Gains Tax
Usually, you need to pay Capital Gains Tax (CGT) when selling a home that’s not your main residence. In the UK, for properties sold on or after 27th October 2021, you must report and pay it within 60 days of completing your sale.How much is Capital Gains Tax?
Capital Gains Tax is based on the profit you’ve made from the property sale, not how much it sold for in total. This is usually the difference between what you paid and the amount you got when it sold. If the sale price is lower than you paid for the property, then you haven’t made any capital gains, so don’t need to pay Capital Gains Tax.Capital Gains Tax allowance for 2022/23
The Capital Gains Tax allowance for 2022/23 is £12,300. This means you can make £12,300 in capital gains (i.e. a profit on a property sale) before paying CGT. You can’t carry over any unused allowance into the next tax year.
Capital Gains Tax allowance for 2023/24
In the 2022 Autumn Statement, the UK government announced that the Capital Gains Tax allowance will be cut from £12,300 to £6,000 in 2023-24. It’ll be cut again to £3,000 from April 2024.
How to calculate your Capital Gains Tax
1. Work out your gain
Work out your gain by taking the property sale price and deducting what you paid for it.
2. Subtract your expenses
Subtract any allowable expenses, like legal fees, estate agent fees and stamp duty. You can also include the costs of any improvement works you’ve paid out - for example, that beautiful extension.
3. Subtract CGT exemptions
Subtract any Capital Gains Tax exemptions or reliefs you’re eligible for. If you ever lived in the property - even for a short time - you might be able to claim some private residence relief.
4. Apply your rates
Work out how much you owe based on the CGT rates on the property. This will depend on how much taxable income you had in the tax year you sold the house.
If you’re a basic rate taxpayer, you’ll pay 18% Capital Gains Tax on the profit or gain you’ve made from selling the property. But you’ll pay 28% tax on any amount above the basic tax rate. If you’re a higher or additional rate taxpayer, you’ll pay 28% on all gains from residential property.
How to reduce your Capital Gains Tax
Facing a hefty bill? There are some ways you can reduce your CGT. We recommend you speak to an accountant or financial advisor before taking action.
1. Share ownership with your husband, wife or civil partner
Everyone has their own Capital Gains Tax allowance. So if you go from being a sole owner to a joint owner with your spouse or civil partner, you can double your allowance.
2. Think about your tax rates
Basic rate taxpayers pay less CGT than higher rate taxpayers. Say your spouse or civil partner is a basic rate taxpayer, and you’re a higher rate taxpayer. You could pay less by transferring the property into their name instead and paying the lower CGT rate.
3. Time the sale right
If you’re near the end of the tax year and have used up your annual CGT allowance, think about delaying the sale until after 5th April, when it will be refreshed.
4. Make the property your main residence
Do you own a couple of properties and want to sell one? You might be able to reduce or even avoid a Capital Gains Tax bill by nominating it as your main residence before selling. Rules on doing this are strict, so speak to a financial adviser first.
5. Don’t forget to deduct buying and selling costs
You can exclude many buying and selling costs from your profit. This includes all legal and estate agent fees plus any stamp duty. Unfortunately, you can’t deduct any costs for maintaining the property. And yes, that does include your stunning decor.
Capital Gains Tax on inherited or gifted property
When you inherit a property, you’ll inherit it at its market value at the time of the previous owner’s death. No one will need to pay CGT at this stage, but the home’s value will be included in the person’s estate. Depending on the size of this estate (assets minus any debts), you may need to pay inheritance tax.
If you decide to sell the property and haven’t made it your home, you might have to pay CGT. How much you pay will be based on the property’s value when you sell it, compared with how much it was worth on the date of death.
Lucky enough to have been given a home as a gift? Are you wondering how much your house is worth today? The property’s value will still be included in inheritance tax calculations if the person who gave it to you passes away within seven years. If you sell the property, the CGT will be based on the increase in value between the date you were given the house - not the date of their death - and the date you sell it.
How Capital Gains Tax is calculated
When the property is inherited, the CGT is the property's value when you sell it, compared to how much it was worth on the date of death.When the property is gifted, the CGT is the property's value when you sell it, compared to how much it was worth on the date you were given it.
In either case, you can still deduct any selling costs and tax exemptions before you pay Capital Gains Tax.
Capital Gains Tax FAQs
Here are some more of the most common questions we’re asked about CGT.
How long do you have to keep a property to avoid Capital Gains Tax?
In the UK, there’s no specific time to keep a property to avoid CGT. It usually applies when you sell a property that’s not your main residence - regardless of how long you’ve owned it.
How does letting relief work with Capital Gains Tax?
If you've rented out some or part of your house, you might need to pay some CGT when you sell it - even if it was your main home. But if you used to live in a property that you rented some or part of out, you might be able to claim letting relief, which can reduce your CGT bill. This doesn’t apply to buy-to-lets that you’ve never lived in. And you can’t claim private residence relief and letting relief for the same period.
Which other taxes may be due on UK property?
Capital Gains Tax is just one tax that applies when you sell a property. You’ll probably have to pay stamp duty when you buy a home. And if you let out a property, you’ll likely need to pay income tax on the rent. You may also be charged inheritance tax. You can find out more about taxes for selling property.
Find out what your house could be worth
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