Looking at what Capital Gains Tax is, how it affects selling a property, and when you need to pay Capital Gains Tax when selling a home.

Capital Gains Tax is a tax that you have to pay whenever you are selling an asset for a profit. This is standard for most things you purchase, however when it comes to property, it can be a little different. It can leave you asking questions like when do you pay Capital Gains when selling a house?

Capital Gains Tax is a complex subject and it is easy to feel overwhelmed by it. If you have found yourself wondering, ‘what is Capital Gains Tax?’ or ‘when do you pay Capital Gains Tax on a second home?’ or even ‘when do you pay Capital Gains Tax when selling property?’

Then this is the article for you. Within this blog post, we will be looking at the answer to these questions and more.

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What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on the profit on the majority of non-inventory assets. The most common capital gains are realized from the sales of stocks, bonds, precious metals, and property.

A good example of this would be if you purchased your property for £25,000 and later sold it for £50,000, you made a gain of £25,000 which will be subject to Capital Gains Tax.

Capital Gains Tax can be a complex subject to get your head around and it can be difficult to understand whether you actually have to pay the tax or not.

What Kind Of Tax Do I Need To Watch Out For?

When it comes to the property you're selling, there are two potential taxes that you may be subject to. These two taxes include:

  • Capital Gains Tax – We have briefly discussed what this is already, but we will go into further detail later on in the blog post.

  • Inheritance Tax – Inheritance Tax is paid in the tragic circumstance that someone had died. It is paid on the estate of the deceased and the amount you pay depends on the value of your house as there are certain thresholds. The standard charge of inheritance tax is 40%, but it’s only charged on the amount above the threshold.

When Do I Have To Pay Capital Gains Tax?

You should supply to submit a tax return if you have capital gains within a particular year.

If you sold a property within the 2019-20 tax year, you would have until the next self-assessment deadline on 31st January 2021 to declare any profit that was made from the sale and to pay the tax that you owe to HMRC.

There have been changes made to how people pay Capital Gains Tax since April 6th.

If you make a taxable capital gain from UK residential property, either as a landlord or second home owner, you will have to pay the tax owed within:

  • 60 days of selling the property if the completion date was on or after 27th October 2021

  • 30 days of selling the property if the completion date was between the 6th of April 2020 and 26th of October 2021.

What Do You Pay Capital Gains Tax On?

According to the GOV.uk website, Capital Gains Tax is paid on the gain when you sell:

  • Personal possessions that are worth more than £6,000, apart from your car

  • Property that is not your main home

  • Your main house of residence if you have let it out, used it for business or it is incredibly large

  • Any shares that are not in an ISA or PEP

  • Business assets

These are classed as ‘charged assets'.

You may be able to reduce any tax that you pay by claiming a relief, but this depends on the asset. If you are planning on selling an asset you jointly own with someone else, it is worth bearing in mind that any capital gains you get will be taxed.

What Do You Not Pay Capital Gains Tax?

Capital Gains Tax is only deductible on your total gains when they are above an annual tax-free allowance. As a rule of thumb, you do not have to pay Capital Gains Tax on gifts to your husband, wife, civil partner, or charity.

There are certain assets that you do not have to pay Capital Gains Tax on, such as any gains you made on:

  • ISAs or PEPs

  • UK government gilts or Premium Bonds

  • Betting, lottery, or pools winnings

In The Event Of Death

In the unfortunate circumstances that someone has died and you inherit an allowance, inheritance tax is usually paid by the estate of the deceased. When it comes to Capital Gains Tax on inherited property, you only have to work out if you need to pay Capital Gains Tax if you later dispose of the asset.

Assets Stored Overseas

If your asset is stored overseas, you may have to pay CGT.

When Do You Pay Capital Gains Tax On Sale Of A Property?

If you are selling your home and you have lived there the majority of the time or if you 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.

In order to not pay CGT on the property, you must have not rented out any part of the house (having a single lodger does not count) or used any of it for business needs. The property must also not have been purchased in order to make a profit. Similarly, married couples must only count one property as their main home at any one time.

Capital Gains Tax Allowance

The good news is that you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance. This is also sometimes referred to as the Annual Exempt Amount.

The Capital Gains tax-free allowances are:

  • £12,300

  • £6,150 for trusts

Want to reduce your Capital Gains Tax?

What Factors Determine Capital Gains Tax?

One of the reasons why there is no solid cost when it comes to capital gains when selling a house is because the amount that you owe will depend upon a multitude of factors. These factors include the asset as well as your own situation. Here are a few of the most common factors of the amount of capital gains when selling a house:

  • The Core Value – The core value of an asset is one of the main factors in CGT. In the case of the property, the core value would be the sale price.

  • Type Of Asset – The type of asset that you are selling plays a big role in determining the CGT owed. Residential property is susceptible to more CGT than other types of investments.

  • How Long You Have Owned The Asset – The longer that you have owned an asset, the lower percentage you will be taxed.

  • Personal Situation – If you are a higher rate taxpayer, you are more likely to be charged a higher rate of Capital Gains Tax.

What About Capital Gains Tax On Mixed Use Property?

When a property is a mix of commercial and residential, it is classed as a ‘mixed use’ property. When a property is mixed use, the way that you pay Capital Gains Tax differs. As a rule of thumb, if any part of the property is making you income, then you are liable for Capital Gains Tax on that part of the property.

An example of this would be that if you were to rent out 100% of a building, then you would be liable to pay Capital Gains Tax on any profits made. But if you live in the building then you are only liable to pay Capital Gains Tax on the part that you let out.

So, if you owned a block of 4 flats and you live in one of them, then you would be liable to pay CGT on the other 75% of the building.

How Much CGT Do I Need To Pay?

If you are required to pay Capital Gains when selling a house, then you now need to figure out exactly how much you owe. It can be complicated to work out as CGT is calculated on your overall income for that year.

If you are classed as a higher rate income one word taxpayer then you will have a Capital Gains Tax of 28% to pay.

The amount that a basic taxpayer pays completely depends on the size of the gain, but if you stay within the basic rate band then you’ll need to pay 18% on the gains.

How Do You Work Out How Much CGT There Is To Pay?

The first thing you need to figure out when it comes to deciding how much Capital Gains when selling a house you owe is to decide what kind of taxpayer you are. You must figure out your taxable gains. This is classed as the amount of money you have made from the asset after deducting any allowable losses.

Once you have your taxable amount, you then need to work out what percentage of CGT you are liable to pay. This depends upon if you are a high or basic taxpayer. Once you have worked out which one you are, combine the taxable amount with your annual income.

How To Reduce Capital Gains Tax?

If you are looking for a way to reduce the amount of Capital Gains Tax on a house sale, then there are several routes that you can take to avoid this. You can try gifting any extra properties that you may have or strategically downsizing. These are some of the ways that people can reduce Capital Gains Tax…

Use A Spouse

One way you can avoid Capital Gains Tax is by using your partner to avoid tax liability. As a large part of CGT is based upon your annual income, if you are a high-rate taxpayer then you can sell the property in their name. However, this will only work if your partner does not work.

Offset Your Expenses Against Your CGT

Though it may not be obvious, a house sale is still a business practice. You are still buying assets, holding them for a period of time, and then selling them on. This means that you can file away expenses and offset them against your tax bill.

If you have paid for a new roof or a renovation, keep a hold of the notes. Any costs that you incur as a way of adding value to the property you can offset against the property. This is because you only pay tax on profit, not investments. However, the downside to this option it can be time-consuming, which is not ideal if you are anxious to sell your property quickly.

Downsize Your Portfolio

One sure-fire way to reduce the Capital Gains Tax is to downsize your portfolio strategically. One way you can do this is through a house sale on the open market. However, this can take months and the and even if you accept an offer, there’s no guarantee of a sale, as your buyer may pull out.

The best way to ensure a sale is through a fast house sale company. A fast house sale will allow you to dispose of your assets quickly and efficiently. A cash buyer is the best route to go down for this option as they have the funds to buy your house outright and you can complete the sale in a time frame that suits you.

Does this sound like something that you would be interested in?

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So, if you are ready to sell your house give us a call or fill in our online form for a free, no-obligation CASH offer which we could have in your bank as soon as you choose…

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Alexandra Ventress

Alexandra is a Content Producer who enjoys writing articles, finding out about the property market, keeping you up to date with the latest trends.