When you sell or dispose of property in the UK, you may have to pay Capital Gains Tax (CGT) on the profit made. Understanding how this tax works is crucial for anyone looking to sell property, especially landlords, investors, and second-homeowners. This blog will explore the key aspects of CGT on property, including exemptions, rates, and strategies to minimize your liability.

What is Capital Gains Tax (CGT)?

Capital Gains Tax is charged on the profit (or "gain") you make when selling or otherwise disposing of certain assets, including property. Disposing of property can mean:

• Selling it.
• Giving it away as a gift.
• Transferring it to someone else.
• Swapping it for another asset.

When Does CGT Apply to Property?

You’ll typically need to pay CGT if you sell:

1. A second home (e.g., a holiday home or a rental property).
2. A property you’ve inherited that isn’t your primary residence.
3. Business premises.

However, you won’t usually pay CGT when selling your main home, thanks to Private Residence Relief (more on this below).

Key Exemptions from CGT on Property

1. Private Residence Relief (PRR):
   If the property you’re selling has been your main residence for the entire time you owned it, you’re exempt from CGT.

2. Annual Exempt Amount:
   Every individual has a tax-free allowance for capital gains. For the tax year 2024/25, this allowance is £6,000. Any gains above this threshold are taxable.

3. Transfers Between Spouses or Civil Partners:
   No CGT is payable on property transfers between spouses or civil partners, making it a useful strategy for tax planning.

How is CGT Calculated on Property?

To calculate your CGT liability:

1. Determine the gain:
   Gain = Sale Price - (Purchase Price + Costs of Buying, Selling, and Improvements)

2. Subtract the Annual Exempt Amount (if applicable).

3. Apply the correct CGT rate:

   • Basic rate taxpayers pay 18% on property gains.
   • Higher or additional rate taxpayers pay 28% on property gains.

For example:

• Purchase price: £200,000
• Sale price: £300,000
• Costs (e.g., stamp duty, legal fees): £5,000
• Annual Exempt Amount: £6,000

Gain: £300,000 - (£200,000 + £5,000) = £95,000
Taxable gain: £95,000 - £6,000 = £89,000

If you're a higher-rate taxpayer:
CGT liability = 28% of £89,000 = £24,920

Deadlines for Reporting and Paying CGT

If you sell a UK residential property that results in a CGT liability, you must:

1. Report the sale to HMRC using a Capital Gains Tax on UK Property Account within 60 days of the sale.
2. Pay any tax owed within the same 60-day period.

Failure to meet this deadline may result in penalties and interest.

Strategies to Reduce CGT on Property

1. Make Use of PRR:
   Ensure you claim Private Residence Relief if the property qualifies.

2. Share Ownership with Your Spouse:
   Transferring property ownership to a lower-tax-paying spouse can reduce your tax liability.

3. Deduct Allowable Costs:
   Keep records of all expenses related to the purchase, sale, and improvement of the property, as these can reduce your gain.

4. Time Your Sale Carefully:
   If possible, align the sale with a year where your income is lower, as this could place you in a lower tax band.

5. Offset Losses:
   If you’ve sold other assets at a loss, these can offset your property gains, reducing your taxable amount.

Conclusion

Capital Gains Tax on property can significantly impact your profits, but careful planning can help reduce your liability. Whether you're a landlord, investor, or homeowner, understanding the rules and exemptions is essential for staying compliant and making informed financial decisions.

If you’re unsure about your CGT obligations, consult a professional accountant or tax advisor to guide you through the process and optimize your tax position.

Need expert advice on Capital Gains Tax? Contact us today for tailored solutions to manage your property transactions efficiently.