Capital Gains Tax (CGT) is due on "profit" made when you sell or dispose of an asset that has increased in value.
If you sell a residential property that is not your primary home, you may need to pay CGT on the profit you make from the sale. Understanding how CGT could apply to your residential property can help you plan your finances effectively and help minimise your exposure to CGT An overview of CGT on UK residential property , including calculation methods, exemptions, and potential reliefs is as follows.
1. When Does CGT on UK Residential Property Apply?
Applicable Properties: CGT applies when you sell, gift, transfer, exchange, or otherwise dispose of a property that is not your main home. Examples include buy-to-let properties, second homes, or investment properties.
Primary Residence Exemption: If the property you are selling is your primary residence, it may qualify for Private Residence Relief (PRR), which can significantly reduce or eliminate your CGT liability.
2. Calculating Capital Gains Tax on Residential Property
Generally speaking CGT on the sale of a residential property in the UK at the time of writing is calculated as follows:
Determine the Gain:
Calculate the difference between the selling price and the purchase price (the amount you originally paid for the property).
Subtract any allowable costs from the gain, such as legal fees, estate agent fees, stamp duty, capital improvement costs (e.g., extensions or extensive renovations)
The resulting amount is your assessable capital gain.
Deduct the Annual Exempt Amount:
For the 2024/25 tax year, the annual exempt amount is £3,000 for individuals and £1,500 for trusts. This amount is subtracted from your assessable capital gain to determine the taxable gain.
Apply the Appropriate CGT Rate:
For residential property, the CGT rates are higher than for other types of assets:
18% for basic-rate taxpayers.
24% for higher-rate and additional-rate taxpayers.
To determine which rate of CGT applies, add the gain to your total taxable income for the year from other sources and if the total amount falls within the basic-rate tax band, CGT is due 18% on the part within that band and 24% on the remainder.
Example Calculation:
Purchase price: £200,000
Selling price: £300,000
Allowable costs: £10,000
Capital gain = £300,000 - £200,000 - £10,000 = £90,000
Annual exempt amount (2024/25): £3,000
Taxable gain = £90,000 - £3,000 = £87,000
If the taxpayer is a higher-rate taxpayer, they would pay 24% on the entire taxable gain: £87,000 × 24% = £20,880.
3. Reporting and Paying CGT
60-Day Reporting Requirement: If you sell a UK residential property and CGT is due, you must report the sale and pay the CGT within 60 days of completion using an in-year online digital disclosure.
Self-Assessment (SA) Tax Return: You must also include details of the capital gain in the personal SA tax return for the tax year in which the property was sold.
4. Exemptions and Reliefs
Private Residence Relief (PRR): As mentioned, PRR can exempt the entire gain if the property has been your primary residence throughout the entire period of ownership. If you lived in the property as your main home for only part of the time, PRR may still apply on a prorated basis.
Losses: If you have made capital losses on the disposal of other assets in the same tax year, it may be possible to use those losses to offset your gain arising on residential property.
Summary
Capital Gains Tax on residential property in the UK can have a significant impact on the profit from selling a property that is not your main home. It’s important to understand the rules, calculate the potential liability accurately, and take advantage of available reliefs and exemptions.
As Capital gains tax on UK residential property can be complex, especially periods of non-occupancy, losses or multiple disposals it is normally advisable to consult with one of FLOW’s tax team who can ensure compliance and help reduce tax liabilities where possible.
Comments