Selling a property can be stressful, especially if a person is not familiar with the process. Many questions come to mind but probably the most important one is: “Will I have to pay tax when I sell my house or other property?”.
In this guide, Britain in reviews explains in which cases you must pay taxes and what amount will come out of your pocket.
Capital Gains Tax on properties
Capital Gains Tax (CGT) is the tax due to the result of profits made from selling assets. It’s key to understand that they calculate the tax rate on the financial gain you make and not the amount you sold the property or other assets for. You need not pay the tax when you sell your main home.
However, CGT comes into play when you make a profit from selling the following assets:
- Buy-to-let properties;
- Business premises;
- Second homes;
- Inherited properties.
There are some exceptions with CGT.
For example, you are not required to pay when you sell your car unless it’s used for business. Like mentioned before, Capital Gains Tax doesn’t apply when selling your main residence unless part of it business premises.
Also, you don’t have to pay taxes for belongings sold for the amount of £6,000 or under.
Capital Gains Tax property rates
UK residents pay higher rates of Capital Gains Tax on real estate than other assets.
If you wonder how much is the tax on a property, here are the 2019/2020 year tax rates:
- Basic-rate taxpayers (with annual income below £50,000) pay 18% on profits from selling properties and 10% for other assets.
- Higher-rate taxpayers (with annual income above £50,000) pay 28% on gains from selling a property and 20% for other assets.
“Keep in mind that they include financial gains when working out your tax status for the year. So surprise not if you get pushed to a higher tax band. All taxpayers have an annual £12,000 CGT allowance meaning that financial profits up to £12,000 are tax-free”, comments Paul Gibbens, professional property buyer at House Buyers 4u.
How to work out your CGT?
To calculate the amount of CGT you’ll pay on your property, first work out your total taxable gain - the profit you made from the investment.
To do that you need to follow these three simple steps:
- Take the price you sold your property for;
- Subtract the amount you originally paid for the property;
- The amount left over equals your Total Taxable Gains.
Also, balance losses when selling other assets which are led forward indefinitely.
For example, if you have a £30,000 loss when selling your property, your tax-free profits will increase and you’ll offset the loss the next time you sell a property/asset.
Don’t forget to claim your losses through your self-assessment tax return. They can be declared up to 4 years after they were incited.
When is Capital Gains Tax due?
The payment and filing of CGT are based on the date of an asset sale or transfer.
Your CGT payment is due before you file your return. For instance, if you sell an asset between 1 January and 30 November, your payment is due by 15 December and your return should be due to 31 October of the next year.
Bear in mind that late payments of tax lead to considerable consequences. Interest charges come into play with a penalty for those who are overdue with their payments and ensures that they do not gain a trading advantage over those who pay on time.
- Also, there are additional penalties if taxpayers are late with their return, such as:
- A 5% penalty applies for payments over 30 days;
- A further 5% penalty if the tax due is not paid within 5 months after the penalty date;
- Additionally, there will be a third 5% penalty if the tax due is not paid within 11 months after the penalty date.
What to subtract from your taxable gain?
Work out your earnings by subtracting the amount you first acquired the property for from the sales rate.
Then deduct any legal expenses linked with buying and selling, such as:
- Stamp duty;
- Broker agents’ fees;
- Home improvement costs such as kitchen renewal, repainting, etc;
- Solicitors’ fees.
However, you aren’t allowed to deduct expenses linked with the maintenance of the property.
Also, it’s not legitimate to deduct mortgage interest.
CGT on your primary residence
When you sell your main or only home, CGT does not apply. However, sometimes, you may have to pay tax.
- The property includes additional land/buildings (5000 square metres or more);
- You rent out the property or part of it;
- You expand or restructure the estate;
- You use part of your house exclusively for business (i.e. an office);
- You have another place to recognise as your main residence.
Some of these circumstances may be open to discussion and dispute, so it is better to seek professional advice.
CGT on your second home
If you want to sell a real estate which is not your primary residence then you’re liable to pay CDT according to HMRC. Profits in value above your annual allowance are subject to payment. The amount you’ll pay depends on your income and on the profit you make from the sale.
CGT on buy-to-let property
Like said in the previous section, in case you want to sell a property which is not your main residence and is used for business matters, then you are required to pay Capital Gains Tax.
Also, if you own a buy-to-let property that reaches a higher value than your CGT allowance, you’ll be obliged to pay tax in case you sell it.
CGT on gifted or inherited property
If you give property to your spouse/significant other, or to a charity, you don’t have to pay taxes.
Also, If you inherit a property and you’re not faced with Inheritance Tax then you’re not obliged to pay any further tax until you sell the property.
Which other taxes may be due on UK property?
Capital Gains Tax is one of the taxes that is imposed on properties in the UK. If you’re buying a new property, you must pay stamp duty on the purchase cost. The amount depends on whether it's your primary residence, a second home or buy-to-let property.
Furthermore, residents have to pay Council Tax, with the amount based on the property location, size, and other factors.
If you're leasing out an estate, you're obliged to pay Income Tax on the rent you receive. And if you plan to leave assets to your spouse or children after you pass away, Inheritance Tax may apply on some of its value.