Capital Gains Tax on Property Sale: When Do You Have to Pay?
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Looking at what Capital Gains Tax is, how it affects selling a property, and when you need to pay Capital Gains Tax when selling a home.
Capital Gains Tax is a tax that you have to pay whenever you are selling an asset for a profit. This is standard for most things you purchase, however when it comes to property, it can be a little different. It can leave you asking questions like when do you pay Capital Gains when selling a house?
Capital Gains Tax is a complex subject and it is easy to feel overwhelmed by it. If you have found yourself wondering, ‘what is Capital Gains Tax?’ or ‘when do you pay Capital Gains Tax on a second home?’ or even ‘when do you pay Capital Gains Tax when selling property?’
Then this is the article for you. Within this blog post, we will be looking at the answer to these questions and more.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit on the majority of non-inventory assets. The most common capital gains are realized from the sales of stocks, bonds, precious metals, and property.
A good example of this would be if you purchased your property for £25,000 and later sold it for £50,000, you made a gain of £25,000 which will be subject to Capital Gains Tax.
Capital Gains Tax can be a complex subject to get your head around and it can be difficult to understand whether you actually have to pay the tax or not.
When it comes to selling your asset, you will only be liable for CGT if it has increased in value between purchase and sale. If it has not increased, then you will be exempt from CGT, and depending on your circumstances, you may be able to use that loss to lower the amount you will be required to pay in tax elsewhere.
However, not to worry, this does not mean that all of your profits will be subject to tax. Capital Gains Tax is only applied to part of your profits.
Every year, everyone, even children, receives an Annual Exempt Amount. This amount is a CGT allowance under which any profits will not be taxed. As it currently stands for the 2023/24 tax year, this amount stands at £6,000 with it expected to be cut further to £3,000 for 2024/25.
Exactly how much CGT you will be charged also depends on the amount of time that you have been in possession, more specifically, capital gains tax on sale of property.
The longer that you have been in possession of your home, the smaller the amount of capital gains on property sale you will need to pay. This is referred to as short-term and long-term Capital Gains Tax. This is a technicality that's useful to know about when looking at avoiding CGT.
You will only be required to pay CGT on a property that is not your main residence (your main home where you have lived for at least two years).
So it's landlords, investors, and people with second homes or Buy To Let portfolios who really need to keep their ears open.
What Kind Of Tax Do I Need To Watch Out For?
When it comes to the property you're selling, there are two potential taxes that you may be subject to. These two taxes include:
Capital Gains Tax – We have briefly discussed what this is already, but we will go into further detail later on in the blog post.
Inheritance Tax – Inheritance Tax is paid in the tragic circumstance that someone had died. It is paid on the estate of the deceased and the amount you pay depends on the value of your house as there are certain thresholds. The standard charge of inheritance tax is 40%, but it’s only charged on the amount above the threshold.
When Do I Have To Pay Capital Gains Tax?
You should supply to submit a tax return if you have capital gains within a particular year.
If you sold a property within the 2019-20 tax year, you would have until the next self-assessment deadline on 31st January 2021 to declare any profit that was made from the sale and to pay the tax that you owe to HMRC.
There have been changes made to how people pay Capital Gains Tax since April 6th.
If you make a taxable capital gain from UK residential property, either as a landlord or second home owner, you will have to pay the tax owed within:
60 days of selling the property if the completion date was on or after 27th October 2021
30 days of selling the property if the completion date was between the 6th of April 2020 and 26th of October 2021.
What Do You Pay Capital Gains Tax On?
According to the GOV.uk website, Capital Gains Tax is paid on the gain when you sell:
Personal possessions that are worth more than £6,000, apart from your car
Property that is not your main home
Your main house of residence if you have let it out, used it for business or it is incredibly large
Any shares that are not in an ISA or PEP
Business assets
These are classed as ‘charged assets'.
You may be able to reduce any tax that you pay by claiming a relief, but this depends on the asset. If you are planning on selling an asset you jointly own with someone else, it is worth bearing in mind that any capital gains you get will be taxed.
What Do You Not Pay Capital Gains Tax?
Capital Gains Tax is only deductible on your total gains when they are above an annual tax-free allowance. As a rule of thumb, you do not have to pay Capital Gains Tax on gifts to your husband, wife, civil partner, or charity.
There are certain assets that you do not have to pay Capital Gains Tax on, such as any gains you made on:
ISAs or PEPs
UK government gilts or Premium Bonds
Betting, lottery, or pools winnings
In The Event Of Death
In the unfortunate circumstances that someone has died and you inherit an allowance, inheritance tax is usually paid by the estate of the deceased. When it comes to Capital Gains Tax on inherited property, you only have to work out if you need to pay Capital Gains Tax if you later dispose of the asset.
Assets Stored Overseas
If your asset is stored overseas, you may have to pay CGT.
When Do You Pay Capital Gains Tax On Sale Of A Property?
If you are selling your home and you have lived there the majority of the time or if you have lived there within the last three years, you can claim Private Residence Relief on profit made from its sale. This means you won’t pay Capital Gains Tax.
In order to not pay CGT on the property, you must have not rented out any part of the house (having a single lodger does not count) or used any of it for business needs. The property must also not have been purchased in order to make a profit. Similarly, married couples must only count one property as their main home at any one time.
At what point do you start paying capital gains tax?
You start paying Capital Gains Tax (CGT) in the UK when you make a profit (gain) on the disposal of certain assets. The specific points at which you may be liable to pay CGT include:
Disposing of a Second Property or Main Home:
If you sell a second property or your main home (in certain situations), you may be liable for property sale tax.
Exceptions are usually made for your main home, but CGT may apply if you've let it out, used it for business, or it's very large.
Gains from Transferring Assets to a Partner:
If you transfer assets to a partner and make a gain from this at a later date, CGT is based on the total time you owned the asset(s) together, rather than the date of transference.
Gains from the Sale of Stock and Shares:
Any gains from the sale of stock and shares are subject to CGT, and the amount depends on your tax bracket. The rates are either 10% or 20%, depending on your overall income and other circumstances.
It's important to note that everyone has a CGT allowance, and you only start paying CGT once your gains exceed this allowance. As of the 2023/24 tax year, the allowance is £6,000 for individuals (£3,000 for trusts), but it will be reduced to £3,000 from April 2024. Joint ownership of a taxable asset, such as a second home, allows for the doubling of the allowance to £12,000.
What is the 36 month rule for capital gains tax when selling your house?
The 36-month rule for Capital Gains Tax (CGT) when selling your house refers to the exemption period before the sale of the property. Historically, this exemption period was 36 months, but it has been amended. As of 12 May 2023, for most property sales, the exemption period is considerably less than 36 months. Specifically, it has been updated to 9 months.
This means that when you sell a property, you may be exempt from CGT on the gain for the first 9 months after the sale. The exemption period allows you to qualify for Private Residence Relief, which can reduce or eliminate the CGT on your property sale.
It's important to note that the specific relief periods may vary depending on factors such as the years you lived in the home, the last nine months of ownership (even if you weren't living there), and whether the property was sold before or after certain dates (e.g., before or after 6 April 2020). Additionally, if you own a single home and meet certain conditions (e.g., disabled, in long-term residential care), full relief may be applied for the last 36 months, irrespective of the sale date.
Capital Gains Tax Allowance
The good news is that you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance. This is also sometimes referred to as the Annual Exempt Amount.
The Capital Gains tax-free allowances are:
£12,300
£6,150 for trusts
What Factors Determine Capital Gains Tax?
One of the reasons why there is no solid cost when it comes to capital gains when selling a house is because the amount that you owe will depend upon a multitude of factors. These factors include the asset as well as your own situation. Here are a few of the most common factors of the amount of capital gains when selling a house:
The Core Value – The core value of an asset is one of the main factors in CGT. In the case of the property, the core value would be the sale price.
Type Of Asset – The type of asset that you are selling plays a big role in determining the CGT owed. Residential property is susceptible to more CGT than other types of investments.
How Long You Have Owned The Asset – The longer that you have owned an asset, the lower percentage you will be taxed.
Personal Situation – If you are a higher rate taxpayer, you are more likely to be charged a higher rate of Capital Gains Tax.
What About Capital Gains Tax On Mixed Use Property?
When a property is a mix of commercial and residential, it is classed as a ‘mixed use’ property. When a property is mixed use, the way that you pay Capital Gains Tax differs. As a rule of thumb, if any part of the property is making you income, then you are liable for Capital Gains Tax on that part of the property.
An example of this would be that if you were to rent out 100% of a building, then you would be liable to pay Capital Gains Tax on any profits made. But if you live in the building then you are only liable to pay Capital Gains Tax on the part that you let out.
So, if you owned a block of 4 flats and you live in one of them, then you would be liable to pay CGT on the other 75% of the building.
How Much CGT Do I Need To Pay?
If you are required to pay Capital Gains when selling a house, then you now need to figure out exactly how much you owe. It can be complicated to work out as CGT is calculated on your overall income for that year.
If you are classed as a higher rate income one word taxpayer then you will have a Capital Gains Tax of 28% to pay.
The amount that a basic taxpayer pays completely depends on the size of the gain, but if you stay within the basic rate band then you’ll need to pay 18% on the gains.
How Do You Work Out How Much CGT There Is To Pay?
The first thing you need to figure out when it comes to deciding how much Capital Gains when selling a house you owe is to decide what kind of taxpayer you are. You must figure out your taxable gains. This is classed as the amount of money you have made from the asset after deducting any allowable losses.
Once you have your taxable amount, you then need to work out what percentage of CGT you are liable to pay. This depends upon if you are a high or basic taxpayer. Once you have worked out which one you are, combine the taxable amount with your annual income.
Can I avoid Capital Gains Tax?
1. Employ Strategic Refinancing to Mitigate Capital Gains Tax
A proactive approach to entirely avoiding Capital Gains Tax involves swift and strategic property refinancing. This strategy is grounded in the fact that during a property refinance, the valuation is based on its current market value.
For instance, if the initial purchase price of your property was £80,000, but its current market value stands at £160,000, the refinancing terms would be determined by the updated valuation of £160,000.
In practical terms, if the new mortgage is structured with a Loan-To-Value (LTV) ratio of 25%, you could extract £120,000 without incurring any Capital Gains Tax liability. It is crucial to note that taxes are levied on profits, not on debts such as mortgages. Consequently, this strategic refinancing maneuver allows you to access funds, leaving you with £120,000 for a property initially acquired for £80,000, which can continue to generate rental income each month.
2. Strategically Establish a New Primary Residence to Minimize Capital Gains Tax
Effectively mitigating Capital Gains Tax may be achieved through a strategic relocation for a duration of two years. The pivotal factor lies in the fact that the sale of one's primary residence is exempt from Capital Gains Tax, and tax liability is reserved for properties categorized as investments.
In the scenario where you contemplate selling a second home with a considerably higher value than your current primary residence, designating it as your new Primary Place of Residence could yield substantial tax savings. By doing so, you can seamlessly sidestep Capital Gains Tax, presenting an effective and legally compliant strategy to optimize your financial outcomes.
3. Gift your property to your child through a trust
The number one way for you to avoid Capital Gains Tax in 2023 is to give the property to your child via a trust. Providing that you have got a child and a property worth under £650,000 that's fully paid off, that is.
Not only can it help you avoid CGT, but it can also help you escape Stamp Duty and Inheritance Tax too!
However, it's not the easiest to wrap your head around, so while we have included an example below, we would suggest contacting a trusted accountant before getting serious.
For example:
You purchased a property for £100,000 which has now increased in value to £200,000.
Instead of selling the property, you decide to gift it to your child via a trust fund.
This can be a great way to avoid Capital Gains Tax, maintain a rental income and at the same time, provide your child with valuable business knowledge; while also managing to avoid Stamp Duty Land Tax (SDLT) completely.
If you decide to not pay CGT then you will have to agree to a TCGA Section 260 which is part of tax legislation and allows you to use your lifetime inheritance tax-free allowance instead of paying Capital Gains Tax.
By using the Section 260 you would manage to dodge the Inheritance Tax charged at 40%, or £80,000 (using the example).
Each person in the UK has a lifetime Inheritance Tax-free allowance of £325,000. So as a couple you could use this strategy to funnel up to £650,000 worth of property into a trust. Where it can remain for up to 9 years.
If you're worried about avoiding Capital Gains Tax this way because your child hasn't properly settled down yet, there's no need to be. Because it's in a trust and not in their ownership, in the case they get a divorce you will not lose the property.
How long do you have to live in a property to avoid Capital Gains Tax UK?
To avoid capital gains tax selling house, you must live in the property for the entire period of ownership and make it your primary and only residence. Specifically, you must reside in the property for at least one year to establish it as your permanent residence. Additionally, you can qualify for Private Residence Relief (PRR) for the period you are living in the property and for the last nine months of your ownership period if you no longer live there.
How To Reduce Capital Gains Tax?
If you are looking for a way to reduce the amount of Capital Gains Tax on a house sale, then there are several routes that you can take to avoid this. You can try gifting any extra properties that you may have or strategically downsizing. These are some of the ways that people can reduce Capital Gains Tax…
Use A Spouse
One way you can avoid Capital Gains Tax is by using your partner to avoid tax liability. As a large part of CGT is based upon your annual income, if you are a high-rate taxpayer then you can sell the property in their name. However, this will only work if your partner does not work.
Offset Your Expenses Against Your CGT
Though it may not be obvious, a house sale is still a business practice. You are still buying assets, holding them for a period of time, and then selling them on. This means that you can file away expenses and offset them against your tax bill.
If you have paid for a new roof or a renovation, keep a hold of the notes. Any costs that you incur as a way of adding value to the property you can offset against the property. This is because you only pay tax on profit, not investments. However, the downside to this option it can be time-consuming, which is not ideal if you are anxious to sell your property quickly.
Downsize Your Portfolio
One sure-fire way to reduce the Capital Gains Tax is to downsize your portfolio strategically. One way you can do this is through a house sale on the open market. However, this can take months and the and even if you accept an offer, there’s no guarantee of a sale, as your buyer may pull out.
The best way to ensure a sale is through a fast house sale company. A fast house sale will allow you to dispose of your assets quickly and efficiently. A cash buyer is the best route to go down for this option as they have the funds to buy your house outright and you can complete the sale in a time frame that suits you.
Does this sound like something that you would be interested in?
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