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Capital gains tax on UK property explained

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 taxCapital gains taxCapital gains tax

What is capital gains tax?

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).

How does capital gains tax work?

Applying only to profits made, the UK’s capital gains tax is subject to an annual tax-free allowance of £12,300 in the tax year 2020-21. Married couples and civil partners who jointly share an asset can combine their allowances, making their total tax free allowance £24,600.

Do I need to pay capital gains tax on my UK home?

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.

What are the capital gains rates?

Once you’ve exceeded your annual tax-free amount of £12,300, 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.

What is the CGT allowance?

Your CGT allowance is the amount of capital gain you can earn that’s tax-free. For the 2020-21 tax year (6th April to 5th April), the amount you can earn tax-free is £12,300. Tax is only paid on profits over this amount. 

If your asset or property is jointly-owned, you can combine your CGT allowances to earn £24,600 in tax-free capital gains. 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.

How much CGT will I have to pay?

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 £12,500 from that total.

For example, if your total annual income is £30,000, you’ll have £17,500 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 £12,300 from that, which gives you a total profit of £7,700.

Gross profit £20,000 -
CGT allowance £12,300 =
Total profit £7,700

Finally, you need to add your annual income to your total profit, which is £17,500 plus £7,700. This comes to a total of £25,200.

Annual income £17,500 +
Total profit £7,700 =
TOTAL £25,200

Therefore, you’ll still be in the basic rate tax band (where your taxable income is £12,501 to £50,000 per year), meaning you’ll be taxed at 18% on your capital gains. 

Other deductions to keep in mind when calculating CGT on property, is to include any renovations completed on the property, as well as stamp duty and solicitors’ fees.

When do I need to pay capital gains tax?

If you have capital gains to declare, you will need to submit a tax return before the end of the tax year (traditionally 5th April). HMRC will send you a bill for any outstanding capital gains, which will need to be paid by the end of the tax year. If you need to pay capital gains tax on the sale of a property, your tax bill will be dated from the exchange of contracts, rather than completion of sale.

Can I avoid capital gains tax on my second home?

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.

Do I have to pay capital gains tax on inherited property?

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. 

What should I do with the profit I’ve earned?

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.

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