Do You Pay Capital Gains Tax When Selling Property?
Looking to sell your property but don’t know what taxes you need to pay? Find out more here!
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What Is Capital Gains Tax When Selling Property?
Capital Gains Tax (CGT) is the tax you pay when you gift or sell an asset. If you sell a property for more than you paid, you may be subject to CGT on the capital gains.
The current CGT rate for individuals in the UK is 20% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
However, there is an annual tax-free allowance known as the annual exempt amount that allows you to generate a certain amount of capital gains tax-free each year.
If you are a UK citizen and sell a property that’s your main residence, you may be able to qualify for Private Residence Relief (PRR), which can reduce or eliminate the capital gains tax owed. PRR is not available for estates used exclusively for business or rental properties.
If you sell a property that is not your primary residence, you must pay CGT on any capital gains made.
You can reduce the tax owed by claiming certain expenses and allowances, such as costs associated with buying or selling the property or improvements made to the property.
You can defer the payment of CGT by reinvesting the proceeds from property sales into another qualifying asset.
It is essential to keep accurate records of the purchase and sale of your property and any expenses incurred to calculate the capital gain and any applicable taxes owed accurately.
It is advisable to consult an accountant or financial advisor to understand the specific capital gains tax laws and regulations in the UK to determine the best course of action for your situation.
When Do You Pay Capital Gains Tax?
You will pay Capital Gains Tax (CGT) when you sell an asset that has elevated in value since you bought it. Usually, when you sell your primary residence, you won’t have to pay any CGT due to private residence relief.
However, you’ll usually need to pay Capital Gains Tax on a property if you’re selling a second home or buy-to-let property.
When Do You Have To Pay CGT On Your UK Home?
Although in most cases you don’t have to pay CGT on your primary residence, there are some cases where you will:
- The property includes 5000 square metres or more (this includes open land).
- Part of the property has been sub-let (lodgers don’t count).
- Part of the property is exclusively a business premise.
- The property was bought to make capital gains.
- The property is not considered to be your primary residence.
However, many of these can often be open to dispute or interpretation; if you need help, you should seek the advice of financial advisors.
Do You Pay Tax On Second Homes And Buy To Let Properties?
When you sell a second home or buy-to-let properties, you’ll be subject to Capital Gains Tax.
If you own two or more properties, you can nominate the more valuable property as your primary residence to avoid paying Capital Gains Tax.
However, if HM Revenue & Customs (HMRC) determines that a property isn’t your main home, you will have to pay Capital Gains Tax on any earnings in its value above your CGT allowance when selling a second home.
Do You Pay Tax If You Are Buying And Selling At The Same Time?
Although you will need to pay CGT, you will not need to pay Stamp Duty. You only need to pay Stamp Duty on a property if you purchase one after selling.
If you are buying and selling simultaneously, you will need to factor Stamp Duty into the transaction as it is based on the home value — and can end up being thousands of pounds.
However, not all properties will be subject to stamp duty. Stamp Duty usually applies to property purchases over £300,000 for first-time buyers or £125,000 for home-buyers.
Do You Need To Pay CGT On Inherited Or Gifted Property?
If you give a property to a civil partner, spouse or charity, you won’t have to pay Capital Gains Tax.
If you have inherited a property and the estate has paid the inheritance tax, you won’t have to pay any further tax to pay unless you sell the property. The capital gain will be measured from the date you acquired the property.
What Is The Capital Gains Tax Allowance?
All taxpayers in the UK legally have a yearlong capital gains tax allowance, allowing you to earn a certain amount tax-free. You only have to pay CGT on capital gains that exceed your annual budget.
In the tax year 2023-24, this allowance has decreased by 50% from its 2022/23 threshold of £12,300 to £6,000.
Anyone who gains assets over £6,000 annually must pay CGT on the excess amount at their tax rate. You cannot carry over CGT into the next year; you’ll lose it if you don’t use it.
Couples are treated as individuals, not partnered entities, so that each individual can earn up to £6,000 each on the property.
How Do You Calculate Your Capital Gains Tax Bill?
To calculate your Capital Gains Tax Bill, you will need to determine the profit you made from the sale of your property, deduct any expenses, determine the amount of available Relief, calculate the taxable gain, apply the Capital Gains Tax Rate and pay any tax owed.
To determine the profit you made from the sale of your property, you need to subtract the original price of the property from the sale price, which will give you the total gain made from the sale.
If the property was your main home for all or part of the time you owned it, you may be eligible for PRR, which can reduce or eliminate your Capital Gains Tax owed. You may also claim Letting Relief if you rented out part of the property when you owned it.
To calculate your taxable gain, subtract any allowable expenses and reliefs from the total profit made from the sale. Then you will need to apply the Capital Gains Tax rate.
If you owe any Capital Gains Tax, you must report it on your self-assessment tax return and pay the tax owed by the deadline.
What Are The Requirements For Private Residence Relief?
If you meet all the eligibility requirements, you will be able to acquire a tax relief known as Private Residence Relief which covers the Capital Gains Tax. If some but not all requirements fit your property, then you will spend some tax.
The eligibility requirements for Private Residence Relief include the following:
- You have one home, and you’ve listed it as your main residence for all the time you’ve owned it.
- You have not let part of it out.
- You have not used part of your home exclusively for business purposes.
- The grounds, including all buildings, are less than 5,000 square metres.
- You did not buy it to make a gain.
What Are The Capital Gains Tax Rates On Property?
You may face tax liability if none or only some of the Private Residence Relief requirements are met.
If you are an additional or higher rate taxpayer, you must pay either 28% on your gains from residential property or 20% from other chargeable assets.
If you’re a lower rate taxpayer, the percentage you pay hinges on the size of your earnings, your taxable income and whether your growth is from residential property or other assets. To calculate this, you should:
- Work out how much taxable income you have – your income minus your Allowance and any other Income Tax Reliefs you’re entitled to.
- Work out your total taxable gains.
- Deduct your tax-free income from your total taxable gains.
- Add this amount to your taxable income.
- If this value is within the lower Income Tax Band, you’ll pay 10% on your earnings (or 18% on residential dwellings). You’ll pay 20% (or 28% on residential dwellings) on any quantity above the lower tax rate.
If you are a trustee, business or personal representative of someone who’s died, you will pay 28% on residential dwellings and 20% on other liable assets. You’ll pay 10% if you’re a lone trader or partnership, and your earnings qualify for Business Asset Disposal Relief.
How Can You Reduce Your CGT Bill?
Capital Gains Tax on a property is charged on capital gains rather than the sale price. There are a few ways to reduce your Capital Gains Tax Bill, but we would always recommend that you seek a financial advisor to aid you:
Deducting costs when working out your CGT bill, including estate agent fees, selling costs, Stamp Duty incurred when purchasing the property and conveyancing fees.
Deducing costs of improving assets, such as paying for a bathroom renovation, can also be considered when working out your taxable gain.
However, you cannot deduct costs involved in the upkeep of the property, like interest on a loan to buy the property.
You can offset losses you’ve made when selling other assets; for example, if you own multiple properties and cause a loss of £25,000 when selling one of them, you can use that against the gains you make when selling another property and reduce your overall CGT bill.
You can consider joint ownership with your spouse or civil partner, as everyone has a Capital Gains Tax allowance, so if you are the lone owner of a property, you can double your allowance by sharing ownership with your partner.
If your spouse is in a lower-rated tax bracket than you, you could transfer all or part of the property into their name, as this will reduce your Capital Gains Tax Bill.
If you have used some or all of your Capital Gains Tax allowance for a particular year, you should consider delaying the sale of your property to the next tax year — remember that the allowance does not transfer over tax years.
If you have multiple properties, you can nominate the property you wish to sell as your main residence to reduce or eliminate the Capital Gains Tax Bill on that property.
If you have lived in the property at the same time as letting it out to tenants, you may be eligible for Letting Relief which may reduce your CGT Bill.
Capital Gains Tax FAQs
When you sell your property, you’ll have to pay Capital Gains Tax on most sales of UK property within two months (60 days). If the property belonged to someone who has recently died, you must include this information in the report to HMRC.
You can report the Capital Gains Tax to HMRC by using HMRC’s online Capital Gains Tax Service, but first, you will need to calculate your capital gains.
The average cost to sell a house in the UK will vary depending on current market trends, however in 2022, the average cost was £10,401. This is due to estate agent & conveyancing fees, EPC & removal company costs, Mortgage exit fees, Early Mortgage Repayment charges, CGT and porting a mortgage.
You do not need to pay Capital Gains Tax on your primary residence (somewhere you have lived for two years or more), as PPR covers this. You may be able to transfer property to your primary home or your spouse in a lower tax bracket — but please check this with a financial adviser.
Any profit from selling a home will be added to your taxable income or salary, but these will be added if you are eligible for any allowances or tax reliefs.
Usually, when selling your main residence, you will not need to pay the two main taxes; Capital Gains Tax and Stamp Duty. PRR will cover Capital Gains Tax, but Stamp Duty is only for property buyers.
However, if you are selling your property and then buying an onward property, you will pay Stamp Duty on that property.