If a property, which is not your main home, has risen in value since it was bought (or given to you) then you’re likely to make a capital gain (i.e. profit) when that property is sold.
…..and when that happens then there may be some Capital Gains Tax (CGT) to pay on that profit.
Anyone with a rental property or second home in particular must be aware of the more complex rules which will apply on their sale. These rules cover BOTH the tax and reporting of the capital gain.
These rules are quite different from those which apply to other types of capital gain.
This article summarises these complex property rules and highlights possible ideas to reduce any Capital Gains Tax bill.
When might Capital Gains Tax apply to the property?
Any profit made on the sale of a residential property which is the main home throughout the time it has been owned is tax-free.
In almost every situation when a residential property is sold which is not the main home there will be Capital Gains Tax reporting issues to consider and may well be CGT to calculate and pay.
This is likely to occur when….
- Selling a residential property (incl rental property or property inherited)
- Gifting of a property to someone other than your spouse
- Transferring a property into a limited company
- Moving a property into a Trust
How is the capital gain tax calculated?
When considering the tax implications when disposing of property the first step is calculating the capital gain (ie profit) made.
The capital gain is calculated as follows:-
Your sale proceeds
Less any allowable costs
Less any allowable reliefs
The main allowable costs and reliefs are summarised below.
For example.
A property was bought for £90,000 in March 2014, £10,000 was spent in 2018 on an extension and it was sold in March 2024 for £200,000.
The resulting Capital Gain is £100,000.
This is based on the sales proceeds (£200,000) less the costs (£90,000 & £10,000).
What allowable costs could be claimed?
Several allowable costs could potentially be claimed which would reduce the size of any Capital Gain and resulting Capital Gains Tax. These costs include:-
- Estate agents’ & solicitors’ fees
- Stamp duty paid when the property was originally purchased
- Surveying and valuation costs
- Costs linked to improvement work (eg a house extension or cellar/loft conversion).
What allowable reliefs could be claimed?
Two main reliefs could potentially be claimed which would reduce the size of any Capital Gain. These reliefs are:-
1 Private Residence Relief
As mentioned earlier, Capital Gains Tax is rarely paid on the sale of your main home. That’s because any capital gain made is covered by Private Residence Relief (PRR) rules.
IF you moved out of your main home and then started renting it out then you can still benefit from PRR rules.
In this situation, the proportion of the time you lived in the property as your main home can be claimed as PRR and is therefore tax-free.
For example.
Using the same property figures in the example above.
BUT in addition, for the first 5 years out of the 10 years of ownership the property was the main home. For those 5 years PRR can be claimed.
The PRR claim would be £50,000.
This is based on the £100,000 (the capital gain) * (5 years of main home / 10 years of ownership).
2 Last 9 Months
The last 9 months of ownership is tax free. The tax relief is calculated in the same way as the Private Residence Relief.
How much capital gains tax do I pay on the sale of property?
From the Capital Gain deduct the tax-free Annual Capital Gains Tax Allowance of £3000. If the resulting figure is a positive number then there will be some Capital Gains Tax to pay.
The amount of Capital Gains Tax payable on the sale of a property depends on the size of the Capital Gain BUT also someone’s annual income.
IF your annual income is more than £50,271
You are already a higher or additional rate taxpayer.
That means the whole capital gain is taxed at the 24% CGT rate
IF your annual income is less than £50,271
The capital gain figure is added to the annual income figure
The part of the gain when added to the income < £50,270 is taxed at 18% CGT rate
The part of the gain when added to the income > £50,270 is taxed at 24% CGT rate
For example.
Using the property figures from the earlier example.
The sale proceeds of £200,000 & cost of £100,000.
The Capital Gain after deduction of the £3000 Annual Capital Gains Tax Allowance is £97,000
Income of £60,000 CGT payable is £23,280 (based on 24% of £97,000)
Income of £30,000 CGT payable is £22,064 which is based on :-
Gain under £50,000 : £ 20,270 at 18%
Gain over £50,000 : £ 76,730 at 24%
How Can I Reduce My Capital Gains Tax Bill?
Whilst CGT may have to be paid there are perfectly legal ways to reduce it just by claiming the allowances you are entitled to and structuring your affairs in a tax efficient way.
1 Use Your Tax-Free Allowance
As mentioned earlier every person has a tax-free Annual Capital Gains Tax Allowance (2024/25) is fixed at £3,000 per year.
If you are married or in a civil partnership, you may be able to transfer part of the ownership in the property to your spouse. This could potentially double the tax-free allowance to £6,000.
This is possible by taking advantage of the tax rule which means the transfer of assets between spouses is tax-free.
2 Claim all deductions
As mentioned earlier you are allowed to reduce the Capital Gain by deducting certain costs (eg home improvements, legal costs, etc). By going through all your paperwork should ensure you don’t miss anything and claim every allowable cost that you are entitled to.
3 Pick the best time to sell
The best time to sell a property (purely from a tax perspective) is when you have not disposed of any other assets (eg sale of shares or other properties) in the same tax year.
By spreading the asset sales over several years means you maximise the amount of tax-free Annual Capital Gains Tax Allowances…and thus minimising the CGT to pay.
ALSO.
If you know your annual income is going to fall to less than £50,270 in the near future then it might be worth waiting until that happens before selling the property.
The reason is that more of the capital gain you make will be taxed at 18% rather than 24%.
4 Flip Your Residence
Some buy-to-let property owners ask if they can reduce Capital Gains Tax by ‘flipping’ their property. ‘Flipping’ is where a buy-to-let property becomes someone’s main home.
This might be a viable option if the rental property is unoccupied.
That said, you will need to prove that the property has really become your main home. HMRC will expect your name to be on the electoral register and all bills (council tax, bank statements, driver’s licence, utility bills, etc).
How to notify HMRC and pay
If you have made a gain on the sale of a residential property that was not your main home throughout your ownership, then you must report the gain to HMRC and pay any tax due within 60 days of the sale.
The capital gain must be reported using HMRC’s online standalone return through their real time Capital Gains Tax Service. You need to include a calculation of the gain on the form including all deductions and reliefs you’ve claimed. (You need to set up an account and this takes time so don’t leave it to the last minute)
The form must be filed with HMRC AND the estimated CGT paid within 60 days of completion of the property sale.
There are a number of exemptions to this filing requirement which include:-
- the disposal was to a spouse or civil partner
- the gain on the property sale plus any all other gains during the year are within the tax-free Annual CGT Allowance.
- the property was sold at a loss
- the property is not in the UK
And what about Self Assessment ?
IF you’re already filing a Self-Assessment Tax Return then you’re still required to report the disposal on your self-assessment tax return.
IF you’re NOT already filing a Self -Assessment Tax Return and this property sale is a ‘one off’ then you will almost certainly not need to register for self-assessment just to report it.
If you’d like to discuss any of the above or would like a chat to see how we can help drop us an email to wecare@krystal-clear.co.uk or call one of the team on 0161 410 0020.
