Individuals may need to pay capital gains tax (CGT) when they sell property. This article focuses purely on the tax position when a UK resident individual sells property.
Generally, there won't be the need to pay CGT when the individual sells their main home. However, the sale of a buy-to-let property or second home will be subject to CGT. Sales of main homes are subject to CGT if they are partly used as a business premises, part of the property is rented out or if the property hasn’t been the individual’s main home throughout the period of ownership.
How is CGT reported to HMRC
Traditionally, if a property is sold and the sale is subject to CGT, individuals are required to report the sale in their Self-Assessment tax return for the year in which the sale occurred. The tax return is due by 31 January following the end of the tax year in which the sale occurred.
Changes from 6 April 2020
For UK property disposals made from 6 April 2020, individuals have 30 days after the property’s completion date to report and pay any Capital Gains Tax due on your UK property disposals.
This is done by creating a Capital Gains Tax on UK property account with HMRC and submitting an online return within the 30 days from completion.
In addition to this online return, the disposal still needs to be reported in a Self-Assessment tax return.
How is CGT calculated?
CGT is levied on the gain made when selling an asset. Broadly speaking, the gain is calculated by deducting the purchase price from the sales proceeds.
Tax rates
Basic-rate taxpayers pay 18% on gains they make when selling residential property, while higher and additional-rate taxpayers pay 28%. Bear in mind that any capital gains will be included when working out individuals’ tax rates for the year, so some gains for basic-rate taxpayers will be taxable initially at 18% and 28% thereafter. Commercial property gains at taxed at 10% and 20% for basic and higher/additional rate taxpayers accordingly.
Annual exemption
Individuals have a CGT annual exemption, meaning gains up to the annual exemption are not taxable. The CGT annual exemption is £12,000 in the current (2019/20) tax year.
What is deductible from the taxable gain?
The following costs can be deducted from the gain to reduce the amount that gets charged to CGT:
Costs associated with selling the property - such as estate agent and solicitors’ fees
Costs associated with purchasing the property - such as Stamp Duty, estate agents’ fees and solicitors’ fees
Improvement and enhancement expenditure
Costs involved with improving or enhancing the property, such as paying for an extension or upgrading the kitchen, can be taken into account when working out the taxable gain.
Maintenance costs and mortgage costs are not deductible from any capital gains, although these can be used to reduce the income tax payable on any rental income. See our blog post on tax deductible expenses from rental income.
What tax reliefs are available?
The main two reliefs available when selling a residential property are Principal Private Residence (PPR) relief and lettings relief.
PPR relief
PPR relief is the relief that enables individuals to sell their homes without having to pay capital gains tax (CGT). In order to claim the relief the property being sold must be the taxpayer’s main residence.
If a taxpayer sells their home and it was not their main residence for the entire time they owned the property then they may have to pay some CGT on the sale proceeds. This could be the case if, for example, an individual owned two properties and spent most of their time in one rather than the other or if they moved out of their home to develop it. In such cases, CGT is calculated by reference to the proportion of time that the property was not the taxpayers main residence.
Where a property has been an individual’s main residence at some point, the final 9 months of ownership is deemed to be a period of occupation regardless of whether the property was occupied in those final 9 months. On sales prior to 6 April 2020, the final period exemption was 18 months.
There are additional reliefs available for certain periods where an individual moves out of their home for certain reasons and then return at a later date.
Lettings relief
Where a property qualifies for PPR relief, lettings relief is given after PPR relief where part of the gain remains chargeable due to residential letting during a period of absence. Lettings relief is capped, depending on the amount of capital gain and PPR relief. In respect of sales from 6 April 2020 onwards, Lettings Relief only applies in circumstances where the owner of the property is in “shared-occupancy” with a tenant.
Contact Us
Please contact us to find out how the above applies in your circumstances, how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
