Our Easy Guide To Capital Gains Tax
Last updated 19th November 2019 • Lois Arcari • JaeVee
We know that the ins and outs of taxes can seem like some of the hardest stuff to get your head around.
But don’t let it put you off your property goals.
We’ll teach you everything you need to know about the capital gains tax.
We’ll also help you calculate how much you’ll have to pay and avoid any nasty surprises.
So go ahead and take a look!
What is capital gains tax
Capital gains tax or CGT is the tax that you pay on your capital gain (profit) from selling your property or land.
You don’t have to pay CGT if you’re selling your main residence.
Here’s a small sample of the types of property that you’ll usually have to pay the tax on:
- Buy to let properties
- Second homes
- A home which is partly used as a business premise
- A property which has any part leased out - unless you’re living with a single lodger
- An inherited property if you sell it
- Shares in a property if you sell them
- If you develop your home e.g. convert part of it into flats
- If you’re selling part of your garden, when your total plot comes to more than half a hectare/ 1.2 acres
- If you moved out of your property 18 months or more ago e.g to move into a partner’s home (this period may be shortened to 9 months from April 2020)
The amount of tax that you have to pay will depend on the size of your profit and your personal income.
How it affects property
While capital gains tax is sometimes payable on other transactions, the higher rates are usually reserved for property in the UK.
The current capital gains tax allowance is £12,000, which means that you don’t have to pay any CGT on your first £12,000 of profit.
If you’ve made less gains than this, then you don’t have to report them.
You can instead carry them forward to the next tax year.
If your gains are less than the Capital Gains Tax allowance, then you don’t need to report them.
You can carry them forward to the next tax year.
If you’re in the more likely position of having to pay Capital Gains tax, you’ll pay:
- 18% on your gains from selling property if you’re a basic-rate taxpayer
- 28% if you’re a higher or additional rate taxpayer
How much you pay
You only have to pay capital gains tax on the profit you make, not the amount that you’ve sold the property for overall.
You can work out your gain by deducting the amount that you first bought the property for from the sales price.
You then deduct any associated costs involved with buying and selling, like the stamp duty, broker fees, and the improvements you made to the property.
HMRC use your personal income in order to determine the rates at which you’ll have to pay capital gains tax.
They add your taxable gains to your income to determine which income tax band you'll fall into in the year you make your sale.
You then pay capital gains tax at your allotted rates on your taxable profits.
HMRC have their own calculator to help you work out your capital gains tax.
How you have to pay it
Paying your CGT is usually straightforward.
You need to work out any taxable gains you have and then report them to HMRC.
You can do this in 2 ways:
- 1 - You can use HMRC’s real time service
- 2 - Annually in a Self-Assessment tax return
You need to register with HMRC if you want to complete a self-assessment tax return.
You’ll need to report your gain by the 31st of January the tax year after you sold your property.
Paper forms will need to be registered by the 31st October.
You can complete the return yourself or hire an account to do it for you.
What can I deduct from taxable gain
There are certain costs you can deduct from your CGT bill:
- Solicitors fees
- Estate Agents fees
- The Stamp Duty you paid on the property
- The costs of improving your asset e.g paying an extension
You’re not allowed to deduct costs that are involved with the upkeep of a property.
You can't deduct your mortgage interest either - although that can reduce the amount of tax you have to pay on your rental income.
What if you make a loss
You won’t have to pay as much capital gains tax as usual if some of your sales resulted in losses.
These are called allowable losses.
You can deduct these from your profit when you’re working out your taxable gains.
You’ll need to report these in the tax return you send HMRC.
You’re able to claim losses up to four years after they occurred.
You can also deduct any unused losses from previous tax years.
If you have one, it’s always best to speak to your accountant.
They’ll help you decide on the best course of action.
Getting your letting relief
Letting relief is available to some landlords selling property only in circumstances that meet specific criteria.
Letting relief can reduce the capital gains tax payable on a property by up to £40,000 tax free gains.
In order to qualify you have to:
- Already qualify for partial Private Residence Relief e.g you have previously lived in the property you’re selling
- Have let out all or part of your property as residential accommodation
Currently, individuals are allowed to claim relief on their property even if they haven’t lived there for a long while, but some changes were announced in the 2018 Autumn Budget.
You will only be able to claim letting relief if you live in the property at the time of its sale from April 2020.
There will be an extended deadline of the last 36 months of ownership for people who are moving into a care home or have a disability.
You will still be able to claim private residence relief for any period where the property was your main home.
You’ll also need to share occupancy with your tenant when you sell the property in order to be eligible.
You can claim the lowest of the following:
- £40, 000
- The same as the amount of Private Residence Relief you’re going to receive
- The chargeable gain you make from the letting, e.g the gain you make for the period you rented out the property