Q: I bought a three-bedroom house in Belfast 10 years ago when my children started going to university. Now that my kids have finished up at university I am considering selling this property. I expect it to have increased in value and I want to consider my tax position when I sell this property, will I have to pay Capital Gains Tax?
You may have to pay Capital Gains Tax if you make a profit when you sell (or ‘dispose of’) property that’s not your home, for example:
- Buy-to-let properties
- Business premises
- Inherited property
Capital Gains Tax (CGT) is payable when you sell an asset that has increased in value since you bought it. The rate of tax varies based on a number of factors, such as your income and the size of the gain. For residential property, it may be 18% or 28%.
Captial Gains Tax will only apply in some circumstances when you sell your main home (or only home). For example:
- The home includes a lot of land/additional buildings;
- You’ve sub-let part of it;
- Part of your home is exclusively business premises;
- You bought it just to make a gain;
- You have another home that could be considered your main residence.
When will Capital Gains Tax apply?
You only have to pay Capital Gains Tax (CGT) on gains that exceed your annual allowance. The tax-free allowance is currently £12,300 per person for tax year 2020-21. This means your property can increase by this amount before any CGT will be payable on the sale. Any amount above this will incur CGT tax.
Calculating your Capital Gains Tax
If you’re a higher-rate taxpayer, working out the CGT can be quite simple for the sale of a residential property. Just subtract your CGT allowance from your gain, and your bill will be 28% of the remainder. If you’re a basic-rate taxpayer, it’s a bit trickier. You’ll need to work out if your capital gain minus your allowance will lift your income into the higher-rate band. Everything above the band will be taxed at 28%, while everything below it will be taxed at 20%.
If you have capital gains in a particular tax year, you should apply to submit a tax return if you don’t do so already. For property sold in the 2019-20 tax year, you’ll have until the next self-assessment tax deadline on 31 January 2021 to declare any profit made from the sale and pay the tax owed.
Paying Your Capital Gains Tax
From 6th April 2020, you need to report the gain to HMRC on a Capital Gains Tax (CGT) return and pay the tax within 30 days of completion. Failure to pay within 30 days will result in penalties and interest charges.
Given the tight deadline, you’ll need to make sure you have gathered together all the relevant information required in advance. This includes:
- The date you acquired the property;
- The costs of purchase and disposal. Including purchase price and sale price, stamp duty, estate agent fees from the sale, surveyors fees from the purchase, legal fees from the purchase and sale;
- Costs of eligible home improvements;
- Your earning in the tax year.
The tax due is an estimated amount at the time of the gain and could change if the person’s earnings change the tax bracket they fall into. The amount paid is treated as a payment on account and processed on the individual’s self-assessment tax return.
Most people are expected to submit their CGT return online via the HMRC’s government gateway. If you don’t have an account, you’ll need to apply for one. As this can take up to 10 days, make sure you have done this in advance of completing the sale.
New Capital Gains Tax Reporting Rules
The new reporting rules were introduced in April 2020 for UK residents disposing of UK residential property and they could be in for a shock when new rules requiring them to report and pay their CGT liability with 30 days of completion took effect.
Some 13,000 people got a shock in the last six months of 2020 with HMRC issuing penalties for missing the deadline. It is important for all people disposing of property to be aware of the new rules and take appropriate action.
Here to Help
If you have any queries regarding your Capital Gains Tax, please contact us today.