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How much Capital Gains Tax will you have to pay? It depends. In this guide, we’ll explain how Capital Gains Tax works on UK property and prepare you for when you decide to sell.
Not everyone has to pay Capital Gains Tax on UK property; but you might – and it may be more than you think. You can avoid the shock of any unforeseen tax bills by calculating how much you’re liable to pay. Sadly, this isn’t always easy to figure out. We’ll explain everything in a bit more detail, show you how to calculate Capital Gains Tax on property and guide you through the process of paying it.
Capital Gains Tax (CGT) is a UK tax you pay on a portion of the profit – or capital gain - you earn from the sale of various chargeable assets, including property or land that’s not your main residence. The amount you pay depends on your personal income and the profit you receive from the sale.
You don’t only pay Capital Gains Tax on buy-to-let properties. You pay Capital Gains Tax on the capital gain you receive from the sale of other properties that aren’t your main residence, including:
You pay Capital Gains Tax on investment property you own as:
You don’t pay Capital Gains Tax on property owned and sold by a limited company; you pay Corporation Tax which currently stands at 19% (2019 - 2020) and is due to fall to 17% in April 2020. This is because any property you own is viewed as part of your business, not a personal investment.
Capital Gains Tax is payable on property the moment it’s sold. You can report it immediately, but you don’t have to officially pay the money until the 31st January that follows the tax year in which you made your profit.
You sold your property and made capital gains from the sale on 15th July 2019, within the tax year ranging from 6th April 2019 – 5th April 2020. You must pay your Capital Gains Tax by 31st January 2021 to avoid any interest or penalties for late payment.
The amount of CGT you pay on property ultimately depends on two things:
HMRC use your personal income to determine the rates at which you’ll pay Capital Gains Tax on property. They add your taxable gains to your income and see which Income Tax band you fall into the year you made your sale. You then pay Capital Gains Tax at the appropriate rates on the portion of your capital gain that’s taxable.
To work out how much Capital Gains Tax you’ll pay on your property, you must first work out your:
You can find your taxable gain if you:
You can substitute the current market value for the sale price of your property if you haven’t sold it yet.
We’ll keep using the same example throughout and continue to build on it, so you can see how everything works together.
Alternatively, you can use our capital tax gains calculator to help work out how much it may cost you.
You can deduct certain costs from taxable gains to reduce the Capital Gains Tax you pay on your property, including:
You can’t deduct:
The Capital Gains tax allowance on property for 2019 - 2020 is £12,000. This means you don’t pay any CGT on the first £12,000 you earn from the sale of your property.
Following on from the previous example:
If your total taxable gains are under the Capital Gains Tax allowance, then you don’t need to report them to HMRC or pay CGT.
To calculate the taxable gains after your expenses and allowance, you:
Following on from the same example:
Now you know your taxable gains after your allowable expenses and allowance, you can start to work out the rates at which you’ll pay CGT on your property.
It’s a little more complicated when you claim Private Residence Relief or Letting Relief, but we explain this below.
You can avoid paying as much Capital Gains Tax when selling property if some sales resulted in losses. These are called allowable losses and you deduct them from your profit when you work out your taxable gains. To reduce the Capital Gains Tax you pay on the sale of property for that year, you need to report your losses to HMRC in your Self-Assessment tax-return.
If your gains are less than the Capital Gains Tax allowance, then you don’t need to report them. You can carry them forward to the next tax year. Similarly, you can deduct unused losses from previous tax years. It’s always best to speak to your accountant. They can help you decide on the best course of action.
HMRC use your Income Tax band to determine the rates at which you’ll pay Capital Gains Tax. They add your taxable gains to your personal income to see which tax band you fall into the year you made your sale.
The Income Tax rates are:
|Income Tax Band||Taxable Income 2018 - 2019||Income Tax Rate 2018 - 2019||Taxable Income 2019 - 2020||Income Tax Rate 2019 - 2020|
|Personal Allowance||Up to £11,850||0%||Up to £12,500||0%|
|Basic Rate||£11,851 - £46,350||20%||£12,501 - £50,000||20%|
|Higher Rate||£46,351 - £150,000||40%||£50,001 - £150,000||40%|
|Additional Rate||£150,001 and above||45%||£150,001 and above||45%|
The Capital Gains Tax rates on property are:
|Taxable Gains on Property 2018 - 2019||Capital Gains Tax Rate on Property 2018 - 2019||Taxable Gains on Property 2019 - 2020||Capital Gains Tax Rate on Property 2019 - 2020|
|Up to £11,700||0%||Up to £12,000||0%|
|£11,701 - £46,350||18%||£12,001 - £50,000||18%|
|£46,351 and above||28%||£50,001 and above||28%|
Following on from the previous example:
There are certain reliefs that can further reduce the Capital Gains Tax owed on the sale of your property. These are Private Residence Relief and Lettings Relief.
Homeowners who sell their main residence don’t pay any CGT on their property. They receive Private Residence Relief.
You pay Capital Gains Tax when selling property that’s not your main residence, but you may be eligible for some Private Residence Relief if you lived in the property previously. This is known as partial relief.
If you’re selling a property that functioned as your main residence:
If you’re selling a property that’s registered as your main residence and you let out part of it:
The formulas to follow are:
Total gain (£) x (Period you occupy property as main residence in months ÷ Total period of ownership in months)
Total gain (£) x Percentage ownership
Following on from the previous example:
The chancellor announced changes to Private Residence Relief in the 2018 Autumn Budget. From April 2020, individuals who sell their previous residence will only receive Private Residence Relief for the final 9 months of ownership, rather than 18 months. You can find out more in our guide: Buy-to-Let Tax Changes.
Letting Relief is only available to landlords selling property in circumstances which meet specific criteria. Letting Relief can reduce the Capital Gains Tax payable on a property by up to £40,000 of tax-free gains.
To qualify you must:
Currently, individuals can claim the relief on their property even if they haven’t lived there for a long time, but there were some changes announced in the 2018 Autumn Budget. From April 2020, you can only claim Letting Relief if you live there at the time of its sale. You will need to share occupancy with your tenant when you sell the property to be eligible.
The amount of Letting Relief you can claim is the lowest of the following:
This means that, in addition to the Private Residence Relief you can claim, you’ll also receive Letting Relief. Letting Relief will take the form of one of the above 3 options, whichever is the lowest amount.
The below example is the same as the previous one except that this time, you let out your property for a period after you moved out.
Note: the amount of chargeable gain remaining is before you deduct the CGT allowance or any expenses. You would deduct these and then add the figure to your personal income as shown in the previous examples, to calculate how much Capital Gains Tax you’ll pay.
Paying Capital Gains Tax on property is quite straight-forward. Basically, you need to work out your taxable gains and then, if it’s above the Capital Gains Tax allowance, you need to report them to HMRC.
You can report Capital Gains Tax in 2 ways:
If you opt to complete a Self-Assessment tax return, then you must register with HMRC. You also need to report your gain by 31st January in the tax year following the year you sold your property - or the 31st October if you send paper forms.
You can complete a tax return yourself or hire an accountant to fill it out on your behalf.
Now you’ve sold your property, you may be looking for something new. Our mortgage advisers can help you organise your new investment. Call us on 0344 346 3672 or send an enquiry.