Are you planning to sell your home, other assets or a second property? You may need to think about the implications of capital gains tax. Read on to find out more about capital gains tax in the UK and how much you might have to pay.
Capital gains tax* (CGT) is a tax that must be paid on any profits you make when you sell an asset, such as property, that has increased in value. CGT is only due on the profit you make, not on the full amount you sell your asset for.
For example, if you purchase an antique vase for £10,000 and later sell it for £30,000, you’ve earned £20,000. This £20,000 is the taxable amount, subject to some deductions (more on that below).
Applying only to profits made, the UK’s capital gains tax is subject to an annual tax-free allowance of £6,000 in the tax year 2023/24. Married couples and civil partners who jointly share an asset can combine their allowances, making their total tax free allowance £12,000.
Property you sell in the UK may incur capital tax gains on profits made. However, if the property you’re selling is your main home, this is exempt from CGT due to private residence relief. However, any other property or a second home that you sell is subject to capital gains tax.
For the purposes of CGT, a property is classed as your main residence if all of the following apply:
If all of these points apply, you will automatically qualify for private residence relief. This means you will not have to pay CGT when you sell the property. However, if one or more of them applies, you may have to pay some tax. You can find out if you’re eligible for private residence relief here.
Once you’ve exceeded your annual tax-free amount of £6,000 (2023/24), you’ll have to pay capital gains tax based on the tax bracket you fall into. When selling property, a basic rate taxpayer will pay 18% capital gains tax, while higher rate and additional rate taxpayers have to pay 28% capital gains tax.
If you sell assets that are not property, basic rate taxpayers pay 10%, and higher rate taxpayers pay 20%. You should also note that your tax status may be pushed into a higher bracket, because any profits you make will be included in calculating your overall tax status.
Your CGT allowance is the amount of capital gain you can earn that’s tax-free. For the 2023/24 tax year (6th April to 5th April), the amount you can earn tax-free is £6,000 - more than half of the previous tax year's allowance. Tax is only paid on profits over this amount.
If your asset or property is jointly-owned, you can combine your CGT allowances. Important points to note are that CGT allowance is not related to your personal tax allowance, and you cannot build up your CGT allowance as you can’t carry it over to the next tax year.
Calculating capital gains tax when selling property** will depend on your income, which determines whether you’re a basic rate or a higher rate taxpayer.
If you’re a higher rate taxpayer, CGT is calculated by deducting the price you purchased the property for from the new sale price. You’ll then be left with your profit. Payable CGT is 28% of that profit.
If you’re a basic rate taxpayer, CGT can be harder to calculate because you’ll need to work out personal income, profits and any other sources of income (such as the interest you might earn from your savings) to determine if that lifts you into the higher rate tax band. You’ll need to calculate your total income and deduct your personal allowance of £6,000 (2023/24) from that total.
For example, if your total annual income is £30,000, you’ll have £24,000 once you’ve deducted your personal allowance. Then you need to calculate the profit from the property you sold.
To work out how much CGT you might have to pay, let’s say your gross profit is £20,000. You then need to deduct your CGT allowance of £6,000 from that, which gives you a total profit of £14,000
Gross profit | £20,000 - |
CGT allowance | £6,000 = |
Total profit | £14,000 |
Finally, you need to add your annual income to your total profit, which is £24,000 plus £14,000. This comes to a total of £38,000.
Annual income | £24,000 + |
Total profit | £14,000 = |
TOTAL | £38,000 |
Therefore, you’ll still be in the basic rate tax band (where your taxable income is £12,571 to £50,000 per year), meaning you’ll be taxed at 18% on your capital gains.
You can also deduct certain other costs from your gain when calculating CGT on property. These include stamp duty, estate agent and solicitors fees, as well as the cost of any renovations, for example an extension. However, you cannot deduct costs relating to the upkeep of the property.
If you sold property in the UK on or after 6th April 2020, you must report and pay any tax due. You pay this tax by completing a ‘residential property return’.
Changes to the timescales for reporting and paying CGT were announced in the 2021 Autumn Budget. For property completion dates on or after 27 October 2021, you have 60 days in which to report and pay any CGT owed. If your completion date was between the 6th April 2020 and 26th October 2021, you must report and pay capital gains tax within 30 days of selling your property.
People who own two homes in the UK could consider which is worth the most money, and register that home as their main address for CGT purposes. However, the rules on doing this are stringent, and it’s best to consult a financial adviser before doing anything.
There is no CGT payable on death, but the value of the home will be included in the estate. This means that inheritance tax may be payable instead.
If you inherit a property and sell it without making it your home, you may have to pay CGT. The amount you have to pay is based on the increase in value between the time of death and the date of sale.
With careful planning, it may be possible to reduce your capital gains tax liability. Here are some strategies to consider, but it’s important to consult an accountant or financial adviser before taking action.
Capital gains tax on UK property is a complicated subject, so it’s always best to consult an expert for advice tailored to your situation.
If you’ve just sold an asset and paid capital gains tax, you might want to consider investing the money you’ve earned as profit into a lump sum savings account. To quickly and easily open savings accounts online, consider using our marketplace. Register for a Raisin UK Account and log in to apply and deposit your savings for free, and watch your savings grow.