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What is Capital Gains Tax?

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Capital Gains Tax (CGT) is a tax on the profit you make when you sell an asset that’s increased in value. An asset can be many things, including personal possessions like jewellery, but in this case we’re going to focus on property. In the UK, you pay higher rates of CGT on property than other assets. Let’s take a closer look.

What is Capital Gains Tax in simple terms?

When it comes to CGT, it’s the gain you make when you sell (or ‘dispose’ of) an asset that’s taxed, not the money you receive. It only applies when the asset increases in value.

What does ‘dispose of’ mean? 

Disposing of an asset can mean many things, including:

  • Selling it
  • Gifting it to someone, or giving it away
  • Swapping or exchanging it for something else
  • Exchanging it
  • Getting compensation (e.g. an insurance payout)

What do you pay Capital Gains Tax on?

You may have to pay CGT if you make a profit selling a property that’s not your main home. It applies to commercial and residential properties. This includes:

  • Buy-to-let properties
  • Inherited properties
  • Second homes
  • Business premises
  • Land
  • If you lease out part of your property
  • Overseas properties

Generally, when selling your main home, you won’t have to pay. This is because you’re entitled to ‘private residence relief’. However, there are some exceptions. 

Exceptions

You may have to pay CGT bill if you:

  • Use part of your home for business purposes
  • Moved out of your home more than 18 months ago
    • Applies if you left it vacant, rented it out or bought another, making it your second home
  • Make money from your property through rental income
    • Only applies if you let out all or part of your home – not if you have a lodger and are living in the property too
  • Develop your property (e.g. convert it into multiple flats)
  • Invested in property with the purpose of ‘flipping’ it i.e. renovating and selling it on to make a profit
  • Sell part of your garden and your total plot, including the part you’re selling, is more than 1.2 acres

What if you have more than one home?

If you use more than one home, you can nominate which will be tax-free. It won’t qualify for tax relief if you bought it just to sell it for a profit, however.

It makes the most sense to nominate the one you believe will make the largest gain when you do come to sell. Married couples and civil partners can only have one main home between them, unmarried couples can nominate a different home each.

What is the Capital Gains Tax allowance?

You only have to pay CGT on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

The Capital Gains tax-free allowance is:

  • £12,300 – individual allowance 
  • 24,600 – couple’s allowance (married or civil partners only)

What rate is Capital Gains Tax?

Capital Gains Tax rates are different for residential properties compared to other assets. The rate you pay also depends on individual circumstances, such as the size of your gain and your taxable income.

Tax BandCGT Rate (Property)
Basic-rate payer18%
Higher or additional rate28%

Be aware that any capital gains could push you into a higher tax bracket, as they’ll be included when working out your status for the tax year. 

Who is exempt from paying Capital Gains Tax?

Some examples of what/when you don’t pay:

  • When someone dies
    • If you inherit a property, inheritance tax is usually paid by the estate of the person who’s died
    • CGT will only apply if you later dispose of the asset, for example if you sell the property without making it your home
  • You only have to pay CGT on your total gains above the annual tax-free allowance
  • The sale of your only/main home
  • The sale of a buy-to-let or second home that was your main residence within the past 18 months
  • You won’t need to pay CGT for the time a property was your main residence, plus the past nine months of ownership (even if you weren’t living there during that time)

What can you deduct from your taxable gain?

In some cases, you can deduct certain costs involved with buying and selling, such as stamp duty or conveyancing fees. You may also be able to deduct the cost of certain renovations, such as an extension. 

Fees involved with property upkeep and maintenance however, will not apply.

How to pay CGT

If you usually fill in a self-assessment tax return, you must report any capital gains. If you’ve made a taxable capital gain from UK residential property in the 2021-22 tax year, you will have to pay the tax owed within 30 days of the completion of the sale or disposal. You’ll do this by submitting a ‘residential property return’.

To report any capital gains, you’ll need to provide:

  • Calculations for each capital gain (or loss) 
  • Details of how much you bought (and sold) the asset for
  • The date you took ownership of the property
  • The date when you disposed of the property
  • The costs of disposing of the asset
  • Any tax reliefs you’re entitled to

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Last Updated: June 14th, 2021