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When it comes to selling a home, the goal is to increase your profits as much as possible. But you also need to consider how taxes will impact the sale. Capital Gains Tax (CGT) can be a confusing aspect of selling a property, which applies to the profit made from the sale of a property, but understanding the nuances of this tax could help you reduce your bill. In this guide, we’ll explore what CGT is, when it’s paid and how you can reduce what you owe to boost your profits on your property sale.
CGT is levied on the profit (or gain) from selling certain assets, including investments, personal possessions worth over £6,000 and properties. In the UK, capital gains are considered a taxable income and how much you’ll owe will depend on the type of asset sold and how much you earn in income. Paying CGT on UK property sales requires an accurate calculation and declaration to HMRC – failure to do so can result in financial penalties.
When you sell an asset for more than you paid for it, the difference in these two costs is considered the capital gain. This is added to your income for the tax year and will impact how much you’re taxed according to the relevant CGT rates. In most instances, the tax rate for higher or additional rate taxpayers sits at 28% while for basic tax rate payers, it’s 18%. But there are allowances for the sale of primary residences, which can be exempt from this liability.
When selling a property, tax is a significant factor to consider. To calculate the taxable gain, you have to determine the cost basis for the property and subtract it from the sale proceeds – the cost basis includes the original purchase price but also any expenses related, such as stamp duty and legal fees, as well as any renovations you’ve made to the property during your ownership.
When selling a buy-to-let property, landlords have to pay CGT on the profits, but the lowering of the tax-free allowance means landlords will need to pay more in the future when they sell. The government has stated that reducing the allowance from £12,300 to £3,000 in the past two years has resulted in 260,000 taxpayers being brought into the CGT bracket for the first time, and this could affect many landlords. In fact, for the 2024-25 tax year, it’s expected that the number of taxpayers paying CGT could rise to over 570,000 people.
If your property was once your main residence before or during letting it out, you may qualify for tax relief which will reduce your CGT bill. This is also applicable to live-in landlords who, for example, let out a vacant room in their home while they also live in the property.
Landlords who let out their entire home will be eligible for Private Residence Relief for the years where the property was their main residence, and the last nine months leading up to the sale. This means CGT will be excluded during these periods.
For those who let out part of the home, you’ll receive Private Residence Relief for the proportion of the home you’ve lived in, and an additional relief known as Lettings Relief. The latter covers a percentage of the chargeable gain you’ve made while letting out part of the property.
While CGT is an inevitable part of selling a property in the UK, there are several effective strategies that property owners can employ to minimise their tax liability.
Making the most of individual savings accounts, ISAs, or a self-invested personal pension (SIPP) is a great way to protect your profits in a tax-efficient way. Many high net worth investors neglect to utilise these tax wrappers, but doing so can mean you’re paying more in taxes than necessary. The current ISA allowance is £20,000 a year, and all ISA investments are tax-free.
In most cases, the annual CGT allowance means you can’t carry any part of it into subsequent years. In other words, if you don’t use it, you lose it. Given that the allowance has already been reduced, and is set to go down again, landlords are advised to make full use of the allowance while they can. Likewise, if you’re considering selling a buy-to-let property and may have already used all or part of your tax-free allowance, you might want to consider delaying the sale of the property.
If a property is owned by more than one person, the tax-free allowance is essentially multiplied by the number of owners which gives you a higher tax-free bracket to work with. Transferring the property into joint ownership before you sell up can be an advantage, providing the other owner hasn’t used their CGT exemption for that tax year. For example, if you sell a property jointly owned by three people, with a profit of £17,000, there won’t be any CGT due because the tax-free allowance per person exceeds the total gained.
If you’re a frequent property investor, you may be able to treat your activities as a property investment business, allowing you to offset certain expenses against your gains and potentially benefit from other tax advantages. But it’s important to note that tax laws and regulations can change over time, and this strategy, as well as others listed here, may have specific requirements or limitations. Consulting with a qualified tax professional is highly recommended to ensure compliance and maximise the potential tax savings.
Navigating the complex world of CGT can be daunting, especially for first-time landlords, but it’s critical that you understand what needs to be paid and how you can reduce your liability when selling a property. Hopefully this guide has covered the fundamentals of CGT, from how it’s calculated to ways you can reduce your tax burden.
Written by Annie Button
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