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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Have you inherited a house that has since significantly increased in value?

With the UK’s property market consistently performing well over recent decades, this is not an unusual position to be in. In January 1990, the average house cost was just over £58,000, but this figure has since risen by almost 400% to £288,000.

Capital Gains Tax exists to limit the amount that citizens benefit from huge increases in asset value. But if you have never had to deal directly with the taxation before, you may be confused about certain details – such as what it exactly is, and when you need to pay it?

We have all the answers you need in our blog below.

What is Capital Gains Tax?

When you sell an asset (for example, a property) that has increased in value since you first bought it, the UK government requires you to pay capital gains tax. You will only need to pay tax on the profit that you make – not on the overall sum.

In the UK, there is currently an ‘Annual Exempt Amount’ that permits you to avoid paying tax on capital gains, up to a certain amount. Currently, this tax-free allowance figure is currently £6,000 for individuals and £3,000 for trusts.

Capital Gains Tax was first introduced in the UK in 1965, and was reportedly introduced to stop people from avoiding income tax, as well as to limit the amount of wealth that individuals make from holding onto assets for long periods of time.

How much is Capital Gains Tax?

Once you go over the current threshold for paying Capital Gains Tax, the rate you pay will be affected by whether you pay higher rate income tax, or basic rate income tax.

If you are currently a higher or additional rate taxpayer, the rate is 28% on gains from residential property, and 20% on gains from other chargeable assets.

If you are on basic rate income tax, then the figures will vary slightly. You will need to take the following steps to calculate your tax due:

  • Work out your ‘taxable income’
  • Calculate out your ‘total taxable gains’
  • Subtract your tax-free allowance from your total taxable gains
  • Add the resulting amount to your taxable income
  • If this amount is within the basic Income Tax band, you will pay 10% on your gains (or 18% on residential property)

If you feel nervous about figuring out the amount of Capital Gains Tax due by yourself, you can get support from an expert, who can do this for you.

When Do You Pay Capital Gains Tax on a Property?

In the vast majority of cases, you pay Capital Gains Tax when you sell a property in the UK. This includes when you sell your second home, a Buy to Let property, or in some cases even your main dwelling. If you are planning to sell an inherited house, this will usually require a CGT payment, too.

Some details may be open for dispute, though – such as whether a house is your ‘main residence’, or whether it was bought with the intention of making a profit. In any instance where you feel that your house sale doesn’t fall under the ‘normal rules’, and therefore shouldn’t be subject to tax, you should seek advice from an expert.

Your Capital Gains Tax payment will usually be made once the sale goes through. It cannot happen until then, as the final sale price must be confirmed in order to calculate the amount of tax due.

Once the sale of your property is completed, you have 60 days to make the tax payment.

When Do You Not Need to Pay Capital Gains Tax on a Property?

You often do not need to pay Capital Gains Tax if the property you are selling is your main home. If you can prove that it is the main (or only) place that you have lived – especially if you have resided there for a long period of time – then tax may not be due.

Some ways that you can prove that a house is your main residence includes:

  • Living there for a long time
  • You don’t own any other houses
  • Utility bills and bank statements all sent to that address
  • Council tax payments

We Buy Any Home are not experts in Capital Gains Tax and you should therefore seek independent advice from a specialist in this area, before making any decisions or mounting a case to avoid CGT.

Are there ways to reduce a Capital Gains Tax bill?

You should speak to a qualified accountant or tax expert if you are keen to reduce your Capital Gains Tax bill. 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

You will need to discuss all these options thoroughly, and make sure that you are following all laws and procedures. A qualified expert can help with this.

Do I have to pay Capital Gains Tax after a divorce?

When you and your ex-partner owned a property jointly, you may wonder how much tax needs to be paid on your profit, once you decide to sell it.

An asset can be transferred when you are separated, and this may enable you to avoid Capital Gains Tax in the short-term. If you lived together at any point in the tax year that you transferred the asset, the normal rules for spouses and civil partners apply. Otherwise, you may have to pay Capital Gains Tax.

The UK government has recently extended the “no gain, no loss” treatment for ex-partners, which gives more time to reach a ‘official’ divorce agreement without bringing into the equation potential tax liabilities.

If you want more guidance on capital gains tax after divorce, then please click on the link.

How have house prices grown in different UK countries?

The amount of Capital Gains Tax you need to pay on a property will often be impacted by the property market’s growth in your part of the country. Not all UK towns, cities and rural villages have experienced the same levels of growth in the recent decades – which makes it useful to understand the price change in your area.

In the year 2000, the average house in Scotland cost £51,587. This figure has increased by 266% to £189,000 in the modern day.

In Wales, the average property was priced at £52,052 in the year 2000. This has gone up by 342% to £230,102 in 2023.

Northern Ireland properties were valued at roughly £72,514 (on average) in 2000, which compares to a 139.8% increase (now at £173,898) in the modern day.

The average cost of a house in England is currently £306,000, which is a 324% increase from 2000, when a property set you back £72,219.

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