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When Do You Pay Capital Gains Tax on a Property?

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When Do You Pay Capital Gains Tax on a Property?
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When selling a property other than your primary one, you must pay Capital Gains Tax.

So, understanding this tax well is essential. 

But what exactly are the Capital Gains Tax rates? When are you exempt from paying this rate? And are there ways to reduce your Capital Gains Tax bill? 

Read on to learn more.

What is Capital Gains Tax?

In the UK, Capital Gains Tax (CGT) is a tax on the profits from selling assets that exceed a tax-free allowance threshold.

In other words, the UK government charges this tax when you sell an asset (for example, a property) that has increased in value since you first bought it. 

This means you will pay tax on your profit – but not the overall sum.

You do not usually have to pay Capital Gains Tax when selling your primary residence. 

It’s only when you sell an additional property, i.e., a second house, which is not your main one, or when selling a probate property.

Annual Exempt Amount

In the UK, an ‘Annual Exempt Amount’ currently permits you to avoid paying tax on capital gains up to a certain amount.

In 2024/25, the annual exempt amount for individuals, personal representatives and trustees for disabled people is £3,000

The annual exempt amount for other trustees is £1,500. Anything over this exempt amount is then taxable.

What are Capital Gains Tax rates?

At the time of writing, the Capital Gains Tax rate in the UK varies depending on whether you are a higher-rate taxpayer or a basic-rate taxpayer. 

The rates are currently as follows:

  • 10% (18% for residential property) for your entire capital gain if your overall annual income is below £50,270 
  • 20% (24% for residential property) for your entire capital gain if your overall annual income is above the £50,270 threshold

You pay this amount on most personal possessions valued at over £6,000, although this does not include your car. Shares in a company and business assets are also included.

At the time of writing, these rates will be in effect from April 6th, 2024 to April 5th, 2025.

When are you exempt from Capital Gains Tax?

You will be exempt from Capital Gains Tax if you prove that the house you sold was your primary residence. 

(You also won’t have to pay a tax when selling your car, as these typically reduce in value over time. The government has never introduced a law making these sales taxable.)

Some other situations when you don’t have to pay Capital Gains Tax include:

  • Betting or pool winnings and lottery prizes
  • UK government gilts and premium bonds
  • ISAs or Personal Equity Plans
  • Compensation for damages for personal or professional injury

It is not uncommon for the Government to change the parameters of what does or doesn’t make you exempt. So, you should consult a qualified tax advisor for the most up-to-date guidance.

Are Capital Gains Tax laws different across the UK?

In general, some taxes differ between England, Scotland, Wales, and Northern Ireland. For example, stamp duty in Scotland is unique.

However, this does not apply to Capital Gains Tax. The thresholds are the same in all four countries.

Ways to reduce Capital Gains Tax bill

You should speak to a qualified tax advisor for more up-to-date advice on reducing your capital gains tax bill without breaking any laws.

Nevertheless, in conversation with these people, you may discover that there are a few ways that you can do this – which include:

  • Take advantage of the Capital Gains Tax allowance
  • Deduct costs – such as stamp duty or legal fees
  • Use your ISA allowance
  • Give money or assets to your spouse or civil partner

It is not usually possible to roll your Capital Gains Tax allowance over from a previous year. After all, these allowances change year-on-year. 

However, you can reduce capital gains tax by offsetting your losses against your profits

This means that if you have made any losses when selling other assets in the same tax year, you can deduct these from your total profits, reducing the amount of capital gains tax you pay.

You could also deduct other costs from your profits, such as conveyancing and estate agency fees.

Will Capital Gains Tax legislation change anytime soon?

The Capital Gains Tax rates and allowances are reviewed and come into effect every April.

How do I submit my Capital Gains Tax payment?

You can often pay an accountant for your Capital Gains Tax. If you wish to do it yourself, you can submit a Capital Gains Tax return through one of three methods:

  • Pay online
  • Write a check
  • Complete a bank transfer

There is information on the UK government website about how to do all three of these things.

Do I pay Capital Gains Tax on an inherited house?

Capital Gains Tax often applies to inherited properties, but there are important points to be aware of.

Suppose you inherit a property via probate, making it a second house. In this case, you will not usually have to pay much Capital Gains Tax if you sell it immediately.

This is because the ‘initial’ value of the house is determined by when you first inherited it, not when the previous owner bought it.

Do I pay capital gains tax after a divorce?

There are policies in place for Capital Gains Tax on Divorce-related assets.

As of 6 April 2023, UK divorcing couples can transfer assets, including property, without Capital Gains Tax implications for up to three tax years after they stop living together. 

This “no gain, no loss” rule simplifies asset transfers during separation. 

However, after the three-year grace period ends, capital gains taxes could be due, especially if multiple properties are involved.

Additionally, court orders related to the divorce settlement may affect how assets are treated, so legal advice is also recommended.

How much profit will I make on a house over ten years?

The UK housing market has an excellent record of improving decade-on-decade. 

For example, the average property price increased by 40.5% over ten years, from £185,620 in 2014 to £260,791 in 2024. 

Many experts expect that UK property will continue to grow in value over the next decade, although this can never be certain.

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