Are you obliged to pay tax when you sell your house or other property?
We are about to shed light on this matter. Below you will find out if any taxes apply to you, and if so, how to lower your tax bill.
If the property you sell is in the UK, you may have to pay Capital Gain Tax (CGT) on the profits. When selling your main home, generally you don’t need to pay the tax.
On the other hand, if you put up for sale your second home or a rental property, you will most likely need to pay a CGT bill. Bear in mind that if parts of your home are used as a business place or leased, you will be faced with a capital gain tax.
A number of changes were set in motion in the 2019/2020 tax year, which we’ll explain below.
CGT on UK property
When selling shares, art or cryptocurrency you need to pay CGT. For property, you pay higher tax rates compared to other assets:
- Basic rate taxpayers are obligated to pay 18% on the profit from selling residential property while higher and additional rate taxpayers pay 28%.
- With other types of assets, the basic tax rate is 10%, and the higher rate is 20%.
- If you live in Scotland, income tax bands differ.
According to Nexa real estate consultant Michael Mayers, when working on your annual tax status remember that any capital gains will be included and may move you to a higher tax section. There is an annual CGT allowance, which means taxpayers can earn a specific amount tax-free.
How much capital gain tax will I pay?
As the name implies, CGT is only applied to the profit you make, not to the amount of the property sale. To figure out your gain tax, calculate the difference between how much you paid for the property and for how much you sold it.
Next, subtract any justifiable costs involved with buying and selling, such as broker fees and stamp duty. Losses can be offset even when you sell other assets.
“For instance: if you make a £60,000 loss from selling a property, that will increase your tax-free gain when selling another.” comments The Home Guide. Claim your losses by contacting HMRC or via a self-assessment tax return. Have in mind that you can do so up to 4 years after the tax year when you sold the asset.
Stamp duty changed on July 8th 2020
According to an official statement, Stamp Duty Land Tax also known as SDLT is temporarily reduced for all residential homes acquired in the period of 8th of July 2020 and 31st of March 2021.
Upon purchase, properties valued below £500,000 now come with zero payable stamp duty, where the previous bar for first-time buyers was down at £300,000, and £125,000 for movers.
"The average stamp duty bill will fall by £4,500 and nearly nine out of 10 people buying a main home this year will pay no stamp duty at all," comments chancellor Rishi Sunak.
Starting April 2021, residents outside of the UK willing to purchase a residential home in England & Northern Ireland are obligated with an extra 2% on top of stamp duty land tax. To sum it up, oversea buyers face a maximum rate that’s 17% unless you become a resident and eligible for a refund.
When is my CGT due for payment?
If you made a property sale, you will have until the next self-assessment tax deadline to record the transfer and pay the tax owed. The deadline is 31 January following the end of the tax year in which the trade was made.
For example: if you sold your house on 20 June 2019, the deal occurred in the 2019-2020 tax year. You don’t need to announce the CGT you owe or pay your bill until you submit a self-assessment tax return on 31 January 2021.
Changes in payment window for capital gain tax
Starting from 6 April 2020, if you make a taxable profit from selling property in the UK, you will have to pay CGT within 30 days from the day of the sale. To do this, submit a “residential property return” and make a payment on account.
How can I reduce my CGT bill?
As mentioned above, you can cut back some of the costs when buying and selling property. Besides the ones we listed earlier, you could also deduct costs associated with improving assets, such as paying for an extension of your property. On the other hand, you cannot deduct costs associated with property maintenance as well as mortgage interest. However, the last one can reduce the tax you owe on rental income.
Looking for more ideas? Read 10 Ways To Cut Your Tax Bill.
Capital gains tax on your main residence
When you sell your main home, you won’t need to pay CGT in most cases, because you will be entitled to 'private residence relief’. On condition that the property was indeed your main home, you won’t need to pay capital gains tax for the period you occupied it. In addition, the past 18* months of ownership of the residence are included even if you didn’t live in it for that period.
*In the 2018 Budget the government announced that this period will be reduced to 9 months from April 2020.
In some circumstances, you may have to pay taxes for property sale if you:
Is there CGT on a second property or on a buy-to-let property?
If the property is not your main residence, you will owe CGT on any increase of value if it is above your CGT allowance. For a buy-to-let property, you will be faced with a capital gain tax if the market price of the asset has risen more than your allowance.
Check out The Complete Guide For Buy-To-Let Landlords.
Do you pay capital gains tax on inherited or gifted property?
Usually, there is no tax if you inherit or give a property for a charity or to a spouse. However, you may need to pay capital gain tax if you later sell the property you inherited. The gain will be measured from the date when you became the legal owner of the property. If the property you sell was occupied by a dependent relative, you may not have to pay CGT. We recommend asking your adviser for more details.
Learn more: Transferring Ownership of Property from Parent to Child: How to get CGT and IHT Relief
Which other taxes are associated with a UK property?
Capital gain tax is one of the taxes you need to deal with when buying a property in London or in the UK. If you consider buying property, here are a few other taxes that you will encounter:
- Stamp Duty Land Tax (SDLT) is payable when buying UK property. The rate is based on the value and nature of the residence.
- Income tax - If you buy a property to let to tenants, income tax is payable based on the rental income.
- Inheritance Tax (IHT) may be charged on some of the property’s value if you leave the property to someone after you pass away.
Are you still figuring out how much taxes you owe? Get in touch with our property experts who are more than happy to help. You can also get an online property valuation in just 60 seconds!