If you find the rules around capital gains on UK property a little hard to follow, our tax technician Trisha Doan is here to demystify things.
First things first. What do we even mean by Capital Gains Tax (CGT)? Essentially it’s a tax on the profit you make when you sell a range of things such as shares, business assets, or valuable personal items like artwork or jewellery. Here, we are focusing on its application to property.
Sometimes people get confused, thinking the capital gain is based on the sale price alone or the full amount you receive. In reality, the taxable figure is calculated by taking the sale price of the property, minus what you paid for it, and minus certain allowable costs.
When does the tax apply?You usually pay CGT on a buy-to-let property or second home. It can also apply to an inherited property if it increases in value over time. Because of Private Residence Relief, you generally do not pay CGT when selling your main home.
What counts as profit?It’s best to think of a real-world example. If you bought a flat for £200,000 and sold it for £300,000, your starting gain would be £100,000. However, you can deduct legal fees from buying and selling, estate agency fees, stamp duty paid when purchasing, and capital improvements such as a loft conversion or extension. This means the taxable gain is often lower than the initial figure.
There is also an annual tax-free allowance known as the Annual Exempt Amount. Married couples and civil partners can combine their allowances to reduce their overall tax liability further.
| Item | Amount (£) |
|---|---|
| Purchase Price | 200,000 |
| Sale Price | 300,000 |
| Initial Gain | 100,000 |
| Legal & Estate Agent Fees | -5,000 |
| Stamp Duty | -3,000 |
| Improvements | -10,000 |
| Taxable Gain | 82,000 |
The rate depends on your income and whether you are a basic rate or higher rate taxpayer. You can check out the current rates here.
How does inheritance work?If you inherit a property, you do not pay CGT at that point. You acquire it at the probate value and, if you later sell it for more than that amount, you are liable for CGT on the increase.
When do you have to pay?Normally the tax needs to be reported and paid within 60 days of a sale going through, so make sure you do not get caught out.
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