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On this page, we will be taking a look at what taxes you may have to pay when it comes to selling your home and in which circumstances you would pay them. Read on for all things relating to taxes when selling a house.
Whilst you may not think that selling your house affects your taxes, you may be surprised by the different types of taxes when selling a house that affect your sale. Whether or not there are taxes involved in selling your house boils down to personal situation. It is not a one answer suits all situations and you need to do your research on exactly which taxes you may end up paying. The typical situations where you may have to pay taxes are if you have inherited the property or if you have made money off of it through renting.
When selling your property there are a few taxes that you could potentially come across. We have detailed these below:
Capital Gains Tax (CGT)
As mentioned above there are three types of taxes that you may have an interest in if you're looking to sell your property. Here's a look into each of them:
Capital Gains Tax (CGT)
This something you have to pay if you sell a property you've inherited at a profit. It does not apply if the property you are selling is your main residence.
Inheriting a property can be a curse & a blessing due to this tax. If a property has increased in value from the date the owner died to the time of the sale, then you may get taxed for this as it will be viewed as a taxable gain.
This is a tax on the profit made from the property sale. The tax applies if, for example, the property value when the owner dies is £100,000 but when you come to sell it you get £150,000, you will be taxed on that £50,000 profit you have made. On this additional gain, basic rate taxpayers will pay 18% but higher or additional rate taxpayers have to pay 28%. It's worth keeping in mind as well the CGT will be included in working out your tax status for the year and could push you into a higher tax bracket.
Another thing to consider is that everyone gets an annual CGT tax-free allowance of £12,300 (In 2022/23).
Inheritance Tax (IHT)
If the estate that you've inherited exceeds the market value of £325,000 then you will have to pay inheritance tax which is due six months after the persons death and if not paid in this time you will be charged interest. The tax is a significant one and is set at 40% on anything over the value threshold, meaning if the house is valued at £400,000 you will be charged 40% of £75,000, so £30,000.
If you decide to rent out your property then you will have to pay tax on any profit you've made, which is something to consider if you’re deciding whether to sell or rent.
Stamp duty is a tax that must be paid when you purchase a property or land over a certain price in England or Northern Ireland. You will only need to pay this tax if you are buying a property at the same time as you are selling one as it is only applicable to buyers. Stamp duty is payable when you buy a freehold property, a new or existing leasehold, property through a shared ownership scheme, such as buy-to-let, or if a property is transferred to you in exchange for payment.
How much tax is paid depends on the amount the property is worth. Previously, stamp duty was paid on the first £125,000 of any property purchase. However recent changes mean that now the first £250,000 of a property is exempt from stamp duty. Buyers must then pay 5% of the value of the home from £250,001 to £925,000, and 10% on properties between £925,001 and £1.5 million and then any property worth more than this will be taxed at 12%.
In some circumstances there are situations in that you may not have to pay some of these taxes so it is worthwhile knowing all of your options, and you may want to seek professional advice around this.
Avoiding Capital Gains Tax (CGT)
If the property is your main residential property and you’ve lived there most of the time or have lived there within the last three years, you can claim Private Residence Relief on profit made from its sale. This means you won’t pay Capital Gains Tax. You must not have ever rented out any part of the house (having a single lodger does not count towards this) or used any of it solely to conduct business. You must also not have bought the property simply to make a profit. Otherwise, you will be subject to Capital Gains Tax. Similarly - married couples are only allowed to count one property as a main home at any one time.
You will not need to pay Capital Gains Tax on a home sale if you meet all of the following:
You have one property that you have lived in as your main home the whole time
The grounds are less than 5000 square meters
You did not buy the property in order to make a gain
You have not let parts of it
You have not used parts of it for business only
There are a few other situations where you don’t usually have to pay CGT:
If the property was a gift from a husband, wife, civil partner or a charity
If the purpose of your business is to buy and sell property e.g., you’re a property developer. Instead you will pay Income tax (if you’re a sole trader or partner) and Corporation tax (if you’re a limited company)
If a dependent relative lived in the property
Selling a property that is a rental property, holiday let, second home, investment property, land or inherited property means you can’t claim Private Residence Relief and may need to pay CGT.
Avoiding Inheritance Tax
When it comes to avoiding inheritance tax on the sale of your home, it can be a little trickier. If you've been left with the property and are due to pay it there isn't much you can do, however, you can always pre-plan for an inheritance situation for your loved ones so that they may avoid the tax. You can do this by:
Leaving money to charity
Leaving the estate to your spouse
Using property allowances
Deed of variation
If you want all the ins & outs then Which.co.uk have a great guide on how you can potentially lower the amount of inheritance tax that you pay.
Avoid Income Tax
Unfortunately, if you are renting a property out this is seen as earning and falls under income tax, which you will be required to pay on your house sale.
Avoid Stamp Duty
Avoiding stamp duty is easier said than done. The first £250,000 are exempt from the tax which helps to reduce the amount you will pay. However, the only sure-fire way to avoid the tax or to at least reduce is to be a first-time buyer buying a property under £500,000.
If the property that you are selling is your main residence then you will normally be exempt from tax.
It is only when you rent out your home, have a second home, or if you use part of your home for a business, that things become a little trickier. This is why it is always a good idea in order to make sure that you do not owe any tax.
Tax on selling a home can be a pretty complex and confusing subject, and if you're still unsure of what you may owe or if there is any way to reduce or avoid the tax rate altogether then it is always worth seeking the advice of a law professional.
As cash buyers, we buy any property, in any condition, in any location. If you want to sell your property quickly or want to find out more about how we can help, then get in touch today. All legal fees are included in our service so what we quote you is what you’ll receive.We only require one quick viewing to make sure that our valuation is correct.
If the tax is too high, we can purchase the property quickly allowing you to get the funds to pay the required fees. We can buy your property in as little as 7 days with our hassle-free "sell house fast" service.