When you sell an asset such as shares, artwork or a second property you may have to pay capital gains tax (CGT) on the amount that asset has risen in value since you first owned it. Here we take a look at how it works and how much you may have to pay after a property sale.
What exactly is capital gains tax?
If you sell, gift, swap or claim insurance for a valuable asset capital gains tax could be applicable. You only pay CGT on the rise in value of that asset, not the total amount you are paid for it. You do not have to pay it if you sell a property that is your main home, although there are some possible exceptions, including:
- Homes with more than 5,000 square metres of land.
- If you have sublet part of it (unless you have just one lodger).
- Part of it is used exclusively for business.
Holiday homes, buy-to-let properties or other property investments will all be subject to the tax. If your livelihood is made developing properties you pay income or corporation tax depending on how you operate your business.
The CGT rate for property is 18% for lower rate income taxpayers and 28% for higher rate taxpayers. This is more than the threshold for other assets which is 10% and 20% respectively.
Reducing your CGT
There are several ways you can legally reduce the amount you have to pay. For a start in 2020/21 everybody has a yearly capital gains allowance of £12,300, married couples and civil partners who jointly own an asset can combine theirs to £24,600.
With this in mind you could share ownership of a home with a partner if they aren’t co-owners already. If you have already used up your allowance or are a higher tax rate payer and your partner isn’t, transferring entire ownership of a home to them may also bring down the amount you have to pay. Delaying your sale until the new tax year when your allowance is renewed is another option to consider.
You can also deduct expenses to reduce your tax. These include:
- Stamp duty you paid buying the property.
- Estate agent’s and solicitor’s fees paid buying and selling the home.
- Improvements made to the property such as an extension.
However you can’t include the cost of maintaining a property or of interest on a mortgage.
One other option is to move into the home you wish to sell and nominate it as your main residence. This can reduce or eliminate all the CGT. However you must genuinely live in the property and use it as your main residence, and be able to prove it to HMRC. The rules on this are regularly being updated so it’s worth checking with a property expert before deciding what to do.
How CGT on property works in practice
If you are a higher rate taxpayer all the gain you make on a property will be taxed at 28%, if you are a lower rate taxpayer it will be taxed at 18% until your overall income reaches £50,000. The rest will be taxed at 28%.
For example, if you bought a buy-to-let house for £200,000 and sold it for £300,000 the gain would be £100,000. If you spent £3,000 on stamp duty and solicitors when you bought it, added an extension for £13,000 and spent £4,000 on solicitors and estate agents when you sold it, you can deduct £20,000 in expenses.
That leaves £80,000 from which you can deduct your allowance of £12,300, taking you to a gain of £67,700.
If you earn £25,000 you will pay 18% on the first £25,000 of this gain, which takes you to the £50,000 higher tax rate threshold. You’ll then pay 28% on the remaining £42,700.
That will leave you with a capital gains tax bill of £16,456.
CGT and inherited property
If you inherit a property and sell it before any increase in value you will not have to pay any capital gains tax. However the estate you’re inheriting may be subject to inheritance tax. But if you keep the house, when you come to sell it you will have to pay CGT on any rise above the home’s value when you inherited it.
Working with us
Selling quickly is one way to avoid paying capital gains tax on an inherited property. We can buy a house in just seven days and have lots of experience dealing with sensitive home selling situations.
We’re also a good option if you want to sell an investment property quickly. Perhaps your tenants are leaving and you don’t want to have the home sitting empty, perhaps you want to release funds to invest elsewhere.
Whatever your reason we can get the process moving in a short space of time with minimum fuss. By selling quickly you’ll avoid covering mortgage payments, there are also no estate agent’s or solicitor’s fees to pay when you work with us. Get in touch if you think we can help.