You will be required to pay capital gains tax, which is the tax that is payable if you have profited from the sale of an asset, in this case, this is your property. However, did you know that this type of tax works differently if you are selling property than it does if you were selling assets such as stocks and shares? This can mean capital gains tax appears more complicated than it in fact is. Octagon Capital explains the vital points you need to know concern capital gains tax on property.
Not everyone pays capital gains tax on property
If you have made gains on your only (or principal) home, it is not usually the case that you will need to pay capital gains tax on it. However, it is likely you will have to pay if you own more than one property.
How do I know if I owe capital gains tax on property?
As previously stated, if you are selling the main home that you are currently residing in, it is usually the case that you are exempt from paying capital gains tax due to a tax relief system that is implemented in the UK, known as ‘private residence relief’.
Nevertheless, things change if you are selling a home that you are currently letting out, or if you are intending to sell a second home. There may be ways though that you can reduce your capital gains tax bill (through accessing tax relief) or by deciding to nominate which of your property you would like to be tax-free. So if you are using bridging loans in order to build up a second property and sell it for more, you will likely pay capital gains tax on this.
When will you need to pay capital gains tax on property?
In summary, here are the following situations where you will most likely be required to pay capital gains tax on a property:
- You use part of your property only for business-related matters
- You purchased a property specifically for the intention of renovating it and then selling it on
- You have moved out of the property for a period of least 18 months, perhaps as you have moved into your partners home
- You have let out a part of your home, or all of it. This does not include if you have a single lodger, as to count not as a tenant you would also need to be living in the building too
- If you sell your total plot (or part of your garden) and including the area you are selling off equates to more than 1.2 acres in size
- You are in property development and are converting a property into flats
Capital Gains Tax rates for property in 2018-19
It is important to be aware of the fact that a proportion of the profits that you make from selling a property can be earned completely tax-free. This is known as being your capital gains tax allowance.
That means that for the 2018/19 tax year, you are able to make £11,700 in profit before you will be liable to pay capital gains tax. This rises to £23,400 if you are married or in a civil partnership.
When it comes to the capital gains tax rates you will pay on the property after this threshold, it will be depending on which tax band you fall under. For example, if you are a basic rate taxpayer, this will mean you will need to pay the equivalent of 18% on capital gains tax for property gains. For higher-rate and additional-rate taxpayers, this rises to 28%.
The tax you need to pay for a second property
You have the option of deciding which home will be tax-free if you use more than one property, and it does not necessarily have to be the property you live in most of the time. You will have a time-frame of two years once you have purchased a property in order to make this nomination. Typically, people in this position decide to nominate the home they expect to make the largest gains when it comes to selling it off.
It is also worth remembering that those who are married or in a civil partnership are only able to have one main home between them. However, couples who are unmarried have the options to each nominates a different home if they so wish.
How does capital gains tax work on gifted or inherited home?
Perhaps you are in the scenario where someone has left their property to you in their will, or your parents or relatives have the intention of giving you the property at a later date. Does this mean you pay capital gains tax?
In this situation, you will inherit the home at its market value at the time of death when you inherit it. Whilst there is no requirement for capital gains tax to be payable on death, the value of the home will, however, be included in the estate (for clarity, this refers to any assets and property taking away the cost of funeral expenses and debts) that will then mean that inheritance tax may be due instead of capital gains tax.
However, you may be liable to pay capital gains tax in this situation if you sell on the property without having made it your own residence, which would otherwise exempt you through private residence relief. If you do pay, the amount you will be required to give will be calculated on the increase in value between the date of the death, as well as the date you sell the property, taking off associated selling costs.
If you fall under the ‘gift with reservation’ category, (for example, you are provided with a property whilst the homeowner still lives there) you may have to pay capital gains tax if you sell the home. You could also still have to pay inheritance tax too once the gift giver passes away.
