Welcome to the complete guide to Capital Gains Tax (CGT) on property sales in the UK in 2023. If you’re selling a property in the UK, it’s vital to understand how CGT applies to your sale. As well as how you can reduce your tax liability. In this guide, we’ll cover the essential rules and rates for CGT on property sales.
We’ll explain how to calculate your CGT liability, the deductions you can claim, and how to qualify for tax reliefs such as Private Residence Relief (PRR). Additionally, we’ll provide advice on how to avoid common mistakes and answer frequently asked questions.
We’ll also offer a range of resources and tools to help you prepare your tax return. Whether you’re selling your main residence, a second home, or a buy-to-let investment, this guide will assist you in navigating the complicated world of CGT on property sales in the UK.
Start this guide knowing that CGT isn’t bad – the more you pay the more you’ve made on your asset. If you want to maximise the value of your property sale use the best estate agent.
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) applies when you sell an asset that’s grown in value. It taxes the profits you make from this sale. The rate of CGT you pay depends on the type of asset you’re selling and your income tax band. When selling a residential property, CGT rates vary. Higher or additional rate taxpayers face a 28% rate. Basic rate taxpayers have an 18% rate.
CGT Rates for Property Sales
CGT payment rate is determined by your income tax band and property type sold. For higher or additional rate taxpayers, residential property gains incur 28% CGT, while other assets attract a 20% rate. Basic rate taxpayers’ rate is influenced by the gain size, taxable income, and asset type.
To calculate payable CGT, total taxable income and gains are considered, followed by the deduction of tax-free allowance. If within the basic Income Tax band, gains incur 10% CGT or 18% for residential property. Any amount exceeding the basic tax rate is subject to 20% CGT, or 28% for residential property.
Consider a taxable income of £20,000 and non-residential taxable gains of £12,600. Deducting the £12,300 tax-free allowance leaves £300 liable for tax. When combined with taxable income, the total is less than the £37,700 basic rate band for 2021-2022. Thus, a 10% CGT rate applies, equating to £30.
For mixed gains from residential property and other assets, use the tax-free allowance to offset the highest-taxed gains. Typically, the allowance offsets residential property gains taxed at 28%.
Trustees or deceased’s representatives pay 28% CGT on residential property and 20% on other assets. Sole traders or partnerships with gains qualifying for Business Asset Disposal Relief pay a 10% rate.
Remember, rates may vary. Checking current rates before selling property is advisable. If unsure of CGT amount, a tax professional can offer specific advice.
How CGT rates vary depending on the type of property and individual circumstance
When you sell a property, you will be subject to Capital Gains Tax (CGT) on any gains you make. The rate of tax you pay depends on various factors, such as the type of property you sell, your income, and whether you pay basic or higher rate Income Tax. If you sell your primary residence, you will not usually pay any tax. However, if you sell a second home, a rental property or any other type of residential property, you will be subject to CGT.
If you pay higher rate Income Tax
- 28% on your gains from residential property
- 20% on your gains from other chargeable assets
If you pay basic rate Income Tax
- If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets. We’ll give examples below.
Trustee or business Trustees or personal representatives of someone who’s died pay:
- 28% on residential property
- 20% on other chargeable assets
Sole trader or partnership and your gains qualify for Business Asset Disposal Relief
- You’ll pay 10%
CGT property related examples
Example 1: Second home gain of £100,000 with £50k taxable income
Suppose you sell a second home that you’ve owned for several years for £500,000, and the base cost of the property was £400,000. This means you’ve made a gain of £100,000. Your taxable income for the year is £50,000, and you have no other gains or losses to consider.
First, you’ll deduct the annual CGT allowance of £12,300 from the gain, leaving £87,700 to pay tax on.
Next, you’ll add this amount to your taxable income, bringing your total taxable income to £137,700.
Since this amount is over the basic rate band of £37,700 for the 2021-2022 tax year, you’ll pay CGT at a rate of 28% on the portion of the gain above the basic rate band.
Therefore, your CGT liability on the sale of the second home will be 28% of £60,000 (the portion of the gain above the basic rate band), which is £16,800.
Example 2: Land sale with £5,000 gain and £20,000 taxable income
Suppose you sell a piece of land for £15,000, and the base cost of the land was £10,000. This means you’ve made a gain of £5,000. Your taxable income for the year is £20,000, and you have no other gains or losses to consider.
First, you’ll deduct the annual CGT allowance of £12,300 from the gain, leaving £2,700 to pay tax on.
Next, you’ll add this amount to your taxable income, bringing your total taxable income to £22,700.
Since this amount is within the basic rate band of £37,700 for the 2021-2022 tax year, you’ll pay CGT at a rate of 10% on the gain.
Therefore, your CGT liability on the sale of the land will be 10% of £2,700, which is £270.
Example 3: Selling your home with £50,000 gain and £35,000 taxable income
Suppose you sell your main residence for £300,000, and the base cost of the property was £250,000. This means you’ve made a gain of £50,000. Your taxable income for the year is £35,000, and you have no other gains or losses to consider.
Since this property is your main residence, you may be eligible for Private Residence Relief (PRR), which means you would not have to pay CGT on the sale.
Assuming you have owned and lived in the property as your main residence for the entire period of ownership. Then the entire gain of £50,000 would be covered by PRR. Therefore, no CGT would be payable on the sale.
Example 4: CGT for Non-UK Residents Selling UK Property
Non-UK residents who sell UK property are also subject to Capital Gains Tax (CGT) on the gain they make from the sale. This includes both individuals and companies who are not resident in the UK for tax purposes.
The CGT owed depends on the property sale’s gain, subtracting allowable expenses and the annual tax-free allowance. As with UK residents, non-UK residents can use the annual tax-free allowance to reduce their CGT liability.
If the non-UK resident is a tax resident of another country that has a double taxation agreement with the UK, they may be able to claim relief from UK CGT. The relief is usually in the form of a credit against the CGT liability payable in the other country, up to the amount of the UK tax payable.
It’s important to note that if a non-UK resident owns property in the UK but is not using it as their main residence, they may also be liable to pay income tax on any rental income they receive from the property. Additionally, non-UK residents who own UK property worth over £500,000 may also be subject to the Annual Tax on Enveloped Dwellings (ATED).
It’s important for non-UK residents to seek professional advice from a tax specialist to ensure they understand their obligations and potential liabilities when selling UK property. This can help to avoid any unexpected tax bills and ensure that all tax returns and payments are made correctly and on time.
How the CGT allowance will change in April 2023
The Chancellor announced during the Autumn Statement on November 17th that taxpayers who are responsible for Capital Gains Tax (CGT) will experience a reduction in the allowance available to them. Effective from April 2023, the allowance will decrease from £12,300 to £6,000, with a further reduction to £3,000 from April 2024.
Prior to the reduction in allowances, an individual could deduct an annual allowance as a tax-free sum before CGT was calculated. In the case of a jointly-owned asset held by a couple, no tax was payable on gains of the first £24,600. However, from April 2023, this allowance will decrease to £12,000.
If you have plans to sell or gift assets in the near future, it may be worthwhile to consider the timing of your disposals prior to the reduction in CGT allowances.
What is Annual Tax on Enveloped Dwellings (ATED)
Annual Tax on Enveloped Dwellings (ATED) is a tax paid by companies, partnerships, and collective investment schemes that own UK residential properties valued above a certain threshold. The tax was introduced in 2013 to discourage the use of corporate entities to avoid or reduce UK tax on high-value residential properties.
The ATED threshold was initially set at £2 million but has since been reduced to £500,000 for properties purchased after 1 April 2016. The amount of tax due under ATED varies depending on the value of the property and ranges from £3,700 to £232,350 for the 2021-2022 tax year. ATED returns and payment are due on an annual basis, and failure to comply with the rules can result in significant penalties.
How to Calculate CGT on Property Sales?
To calculate the gain or loss on a property sale, you need to subtract the sale price from the purchase price, including any costs associated with buying and selling the property. You can also claim certain costs and deductions against the sale price, such as renovation costs and professional fees. Your CGT liability is then based on your income tax band, which takes into account your taxable income and total taxable gains.
Why does CGT apply to property sales?
CGT applies to property sales because property is considered an asset, and when you sell or dispose of an asset that has increased in value, you are deemed to have realised a gain or profit. The increase in value could be due to market forces or because of improvements you have made to the property. CGT is a tax on this gain or profit that you’ve made when selling or disposing of the asset.
In the case of property sales, the government wants to ensure that individuals who have made significant gains on the sale of their property are taxed accordingly. This is especially important for second homes or buy-to-let properties where the gain may be considerable. Therefore, CGT is applicable to property sales to ensure that individuals pay their fair share of tax on the gains made from selling a property. However, tax reliefs such as Private Residence Relief (PRR) are available to help reduce the amount of CGT owed, particularly when the property being sold is your main residence.
What is Private Residence Relief (PRR)
Private Residence Relief (PRR) is a tax relief that can significantly reduce or even eliminate the CGT liability on the sale of a primary residence. This relief applies to any property that you have lived in as your main residence, and it can also apply to some ancillary properties, such as gardens and garages, that are within the same grounds as the main residence.
When does PRR apply?
In general, PRR applies to any property that you have owned and lived in as your main residence for the entire period of ownership. This means that if you have lived in the property for the entire time you have owned it, then you should be eligible for PRR.
There are some cases where PRR may apply even if you have not lived in the property for the entire period of ownership. For example, PRR may apply to a property that you have lived in for a period of time before renting it out, as long as you have not claimed PRR on another property during that time.
How to claim for PRR
To claim PRR, you must fill out the necessary forms and provide evidence to support your claim. You will need to provide evidence of the period of time you lived in the property as your main residence. As well as evidence of any periods where the property was let out.
Once you have claimed PRR, the amount of relief you receive will depend on the length of time you have owned the property, as well as the periods during which the property was your main residence and any periods during which it was let out. If you are eligible for PRR, then you may be able to claim relief on a proportion of the gain, which could reduce or even eliminate your CGT liability.
It is important to note that PRR does not apply to second homes or buy-to-let properties. If you own a property that is not your main residence, then you may be liable to pay CGT on any gains made from the sale of that property.
Who has to pay capital gains tax on a main residence?
Generally, when you sell your home you usually won’t need to pay capital gains tax if it is your main residence you’re selling. However, there are some exceptions where you may have to pay tax these are if:
- you are selling a property which is not your main residence
- the property you bought was solely for gain/profit
- you have ever let a part of your home out (this doesn’t include having a lodger)
- you have exclusively used a part of you home just for business purposes
- All the buildings and land included with the home is 5000 square metres or more
How much capital gains tax do you pay in 2023?
The amount of capital gains tax you pay on property will depend on a number of factors, including how much profit you make on the sale and your personal circumstances.
In general, the rate of you capital gains tax will depend on which tax bracket you fall into. You’ll be liable for capital gain tax at a rate of 20% if you are a standard rate taxpayer. However, if you pay the higher rate tax it will be 28%.
What is the capital gain tax allowance 2023?
There is a tax allowance of £12,300. This means you will only pay tax if the profit you make is over £12,300.
How long do you get to pay CGT?
In the Autumn budget 2021 there were changes to how long you get to pay the capital gain tax. If you sold your home and completion was between 6 April 2020 and 26 October 2021, then you would have 30 days from your completion date to report and pay the amount of tax required.
However, if the completion of your home sale was on or after 27 October 2021, then you would have 60 days from your completion date to get your capital gains tax payed.
How do you pay the capital gains tax?
There are different ways you can pay your capital gains tax. If you would like to pay online then you can either use the HMRC online service where you can use your credit or debit card. Or you can pay by signing into your Capital Gains Tax on UK property account. If you choose to pay through your account you can pay by a corporate credit card or your debit card.
Another way is to do a bank transfer either using telephone banking or your online banking. Or you can send a cheque to them by post. You should have a reference number which starts with ‘x’, you will need to write it on the back of the cheque. To find out the address to send it to you can find it here.
Do you pay on a gifted property?
If you was to gift your home to charity then you wouldn’t have to pay any capital gains tax. However, if you was was to sell to charity and sold it for less than market value or more than you paid for it, you may have to pay capital gains tax.
When you gift to a civil partner/ spouse you wouldn’t need to pay CGT unless in that tax year you didn’t live with your partner, you were separated or, you were to give your partner any goods for them to sell on at their business.
Ways to reduce you capital gains tax bill
Time the sale right
For example, if you are eligible for Private Residence Relief (PRR), which exempts you from paying CGT on the sale of your primary residence, it may be beneficial to sell your property after living in it for at least two years, as this is the minimum qualifying period for PRR. One of the most effective ways to minimise CGT on property sales is to time the sale to maximise tax reliefs.
Offset losses
One way to reduce your CGT liability is to use losses to offset your gains. If you realise both gains and losses in the same tax year, you can offset them against each other. Which may reduce the amount of gain subject to tax. Additionally, any unused losses from previous tax years can be carried forward and used to offset gains in future tax years. But they must be reported to HMRC within four years from the end of the tax year in which the asset was sold.
Sell before April 2023 or April 2024
Effective from April 2023, the allowance will decrease from £12,300 to £6,000. With a further reduction to £3,000 from April 2024. If you have plans to sell or gift assets in the near future, it may be worthwhile to consider the timing of your disposals prior to the reduction in CGT allowances.
Gift to charity
If you give land, property or qualifying shares to a charity, income tax relief and CGT relief are available.
Choose your main residence wisely
If you have more than one property and you are looking to sell one, you can nominate that one as your main residency. This will mean you won’t pay CGT on it. You want to make sure you do it right as the rules are quite strict. So it is best to speak to someone who can advise you.
Use CGT Exemptions
Another way to minimise CGT liability is to use annual exemptions and losses. Each individual is entitled to an annual CGT exemption, which for the tax year 2023-2023 is £12,300. By selling the property in separate tax years, you may be able to utilise this exemption twice. Therefore, reducing your overall CGT liability.
If you have incurred losses from other capital disposals, you can offset them against any gains from selling the property. This helps further reduce your CGT liability.
Look at your partners CGT band
If your partner has a lower rate tax you could put some or all of the property in their name. This may reduce the CGT as basic rate taxpayers pay less CGT.
Use your partners allowance
Transferring assets between spouses can also be a useful strategy for minimising tax bills. By transferring the property to your spouse before the sale, you can take advantage of their tax-free allowance. This could potentially reduce the overall CGT liability. Everyone is entitled to the £12,300 allowance. Therefore, if you shared the ownership of your home with you partner you would then have £24,600 allowance between you.
Consider when you decide to sell
If you’ve used part of your CGT allowance, consider waiting until the next tax year to sell your home. Waiting will allow you to use the full allowance the next tax year.
It’s important to note that these strategies should be implemented with careful consideration of the tax laws and regulations. It’s always advisable to consult a professional tax advisor before making any decisions that could impact your tax liability.
Summary
Capital gains is something to be aware of and know about if you’re selling a property. If you sell your main residence without renting or using it for business, no CGT is owed. If CGT applies, your tax bracket affects the payment, and there are strategies to reduce it. For more information on selling property, read our step-by-step guide to selling your home.
