Here's how to avoid a large capital gains tax bill when selling

Selling up or downsizing could be the right decision for your lifestyle, but sometimes there are capital gains tax implications to consider. We take a look…

Capital gains tax raises billions for the Government every year. Investors and people selling their properties could be in for some hefty tax bills, particularly with the capital gains tax changes coming into play. Capital gains tax, in the simplest sense, is the tax paid on profits from disposing of assets. As of 6th April 2023, the amount of profit you can make from your property sale before incurring a capital gains tax bill reduced from £12,300 to £6,000. It then halves again to £3,000 from the following tax year.

Here’s all you need to know about capital gains tax…

What is capital gains tax?

This is a tax paid on any gains made and it’s effectively the difference between the price you paid for a property that’s not your main residence and the price you sell it for.

What is the 36-month rule for capital gains tax?

The 36-month rule refers to the exemption period before the sale of a property. Previously this was 36 months, but this has been amended recently and is now 9 months.

How much is capital gains tax on UK property? 

If you make a profit after selling a property, you'll pay 18% capital gains tax as a basic-rate taxpayer, or 28% if you pay a higher rate of tax. If you want to know exactly how much you’ll pay in capital gains tax, it’s worth using the Government's online calculator. Other assets that aren’t property-related are charged at 10% for basic-rate taxpayers, and 20% for higher-rate taxpayers.

What can you deduct from your capital gains tax bill?

It’s good to know that you can deduct costs from your tax bill. Things like improvements made to the property whilst you owned it (e.g. a new bathroom or loft conversion) can be added to your initial outgoings, as can stamp duty and legal fees. You can also deduct expenses like solicitor's fees from the selling price. The figure that’s left is the amount you will be taxed on.

Do you pay capital gains tax if you sell through a limited company? 

Capital gains tax is not paid by limited companies. Instead, companies pay corporation tax, which is a different type of payment. You won’t be entitled to use your capital gains tax-free allowance but, for higher rate taxpayers, you’ll be paying 19% corporation tax rather than the higher rate of capital gains which is currently 28%.     

How much is my home worth?

Do you pay capital gains on your main home?

In most cases, you won't need to pay capital gains tax when you come to sell your main home, because you will be entitled to 'private residence relief'. For the amount of time the property was your main residence, you’ll be in the clear. You also get an extra nine months exemption, even if you weren't living in the property during those nine months.

Do buy-to-let investors have to pay capital gains tax?

Yes. The capital gains tax bill does come into play when you’re selling a buy-to-let property or a second home. If you're thinking about selling soon, it’s worth checking that your property is listed for the correct price – with a quick and easy valuation.

How does capital gains tax affect downsizers?

High house prices and demand for larger family homes mean many downsizing older homeowners will receive enormous windfalls when they sell up.

The good news is that there’s usually no tax on the sale of your main residence. The bad news is that if there’s an overlap between moving into your new property before selling your old one, you might have to unexpectedly fork out thousands of pounds. That’s why it’s always advisable to kick start the sales process before you look to buy a new property.

When is capital gains tax on a property due?

For UK properties sold on or after 27 October 2021, you'll need to pay the capital gains tax owed within 60 days of the completion of the sale or disposal. The current annual capital gains tax is £6,300, meaning that this is the amount of profit you can make before the tax is applied. If your gains are under this amount in the tax year then there is no tax liability.

It’s worth noting that, as usual, this is not financial advice. If in doubt, always seek the advice of an expert before making decisions on assets like a property.

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