Capital Gains Tax is payable when you sell certain assets, including when you sell certain types of property. There can be some confusion on when exactly you might have to pay Capital Gains Tax, who pays Capital Gains Tax, and if there’s any way to reduce your tax bill.
Here we look into some of the common queries around Capital Gains Tax. It’s important to remember that each situation will be different, and you should always seek advice from an independent financial adviser if you are unsure what applies to your circumstances.
What is Capital Gains Tax?
You will need to pay Capital Gains Tax when you sell some assets that will have appreciated in value since you originally bought them. These are known as chargeable assets and include:
- Any property that isn’t your main home (including second homes, holiday homes, buy-to-let)
- Property that is your main home if it’s been let out, used for business purposes or if it’s 5000 square meters or larger
- Most personal possessions worth £6,000 or more (not including vehicles)
- Shares (not including ISA or PEP)
- Business assets
When Do You Pay Capital Gains Tax on Property?
You will only have to pay Capital Gains Tax on property that fits into one of the above categories and when your profit, or gains, exceed your annual tax-free allowance.
In the 2021-2022 tax year, the tax-free allowance is £12,300 per person. This was the same in 2020-2021 and is set to remain the same in the 2022-2023 tax year.
So, if your property increases by less than this amount, you will not have to pay Capital Gains Tax. You will only have to pay Capital Gains Tax on any amount from the sale that exceeds this amount.
Who Pays Capital Gains Tax, the Seller or Buyer?
Capital Gains Tax is paid by the seller of the property, as it is paid on the amount of profit the seller makes from the sale. The buyer may have to pay stamp duty, a different kind of tax. If you are buying and selling a property, you may be liable to pay both – Capital Gains Tax for the sale where you act as the seller, and stamp duty for the same where you act as the buyer.
How Much is Capital Gains Tax on Property?
The amount of Capital Gains Tax you pay will depend on your tax bracket. People who pay the basic rate of tax will have to pay 18% on any gains they make on their property sale that’s over their tax-free allowance. People who pay higher and additional rates of tax will have to pay a rate of 28% Capital Gains Tax.
You only pay Capital Gains Tax on the profit you make from the house sale. You can work this out by deducting the sale price from what you originally bought the property for. Any amount that is above your tax-free allowance will be liable to pay Capital Gains Tax at your rate (18% or 28%).
When is Capital Gains Tax from Property Due?
From 27th October 2021, Capital Gains Tax will need to be paid within 60 days of the property sale completion. You can report and pay the amount on the Government website.
How Can I Reduce the Capital Gains Tax I Pay on Property?
If you are a couple and jointly own a property, you can combine your tax-free allowance, increasing it to £24,600 before you have to pay Capital Gains Tax. This means the amount you have to pay Capital Gains Tax on will be less, and so you will pay less tax.
You can deduct some costs that you had to pay when buying or selling the property from your profit, which can reduce the Capital Gains Tax that you have to pay. You can usually deduct costs like broker fees, solicitor fees, stamp duty and sometimes also improvements that have been made to the property in the period you owned it, such as an extension. You will not be able to deduct costs that went into the general maintenance of the property.
You can also reduce the Capital Gains Tax you pay by offsetting losses from other assets you may have sold in that tax year. So, if you sell a buy-to-let property at a loss of £50,000 and then sell another at a profit of £100,000, you can offset the loss against the gain. This will reduce the amount you will need to pay Capital Gains Tax on.
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