Investing in residential property through being a landlord can be an excellent way to generate income and build wealth. However, when it comes time to sell the property, you may be required to pay Capital Gains Tax (CGT) on the profit you make.
This article will explain what CGT is, when it applies, and what you need to do to meet your tax obligations when selling an investment residential property.
Note: this article relates to individuals selling property, and should not be confused with a Limited Company which owns property.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax levied on the profit or ‘gain’ made when you sell or ‘dispose of’ an asset, such as a residential property, that is not your primary residence. Common examples of properties that may be subject to capital gains tax include:
Buy-to-let properties
Business premises
Land
Different rules apply if you are selling your main home, live abroad, or are a company registered abroad – this article is solely focused on investment properties.
When Do You Not Need to Pay Capital Gains Tax?
There are certain situations where you do not typically need to pay capital gains tax:.
These might include:
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- Gifts made to your spouse.
- If the property is a business asset.
- If the gain is small i.e. below your annual gains allowance (see below).
Calculating Your Gain
To determine whether you need to pay any capital gains tax, you must first calculate your gain. This is done by taking away the original cost of the property from the selling proceeds.
You will also need to take into account any additional costs associated with the purchase and sale, such as legal fees, agent fees, and improvements made to the property. It is advisable an accountant undertakes this calculation due to the accuracy required in the calculation and the knowledge on what costs are allowable and disallowable.
Annual Allowance for Capital Gains
Before calculating the amount of Capital Gains Tax you owe on the sale of an property, you will want to take into account the CGT annual allowance – a tax free amount of gains each person can make within each tax year.
For the 2022/2023 tax year, the annual allowance was £12,300 for individuals and £6,150 for trustees of settlements.
For the 2023/2024 tax year, the annual allowance is £6,000.
For the 2024/2024 tax year, the annual is planned to further fall to just £3,000.
Note that the annual allowance cannot be carried over to future tax years; it must be used within each tax year, or it is lost forever.
Capital Gains Tax Rates for Property
The rates of CGT applicable to the sale of investment residential properties depend on your overall income and the amount of your taxable gain. You will need to know details of any income you have received or expect to receive in the current tax year including PAYE income, dividends, and any other capital gains.
As of the 2023/2024 tax year, there are two different rates for property:
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- Basic rate taxpayers: If your total income and taxable gains fall within the basic rate income tax band, you will pay a CGT rate of 18% on your property gains.
- Higher and additional rate taxpayers: If your total income and taxable gains exceed the basic rate income tax threshold, you will pay a CGT rate of 28% on your property gains.
Reporting and Paying Capital Gains Tax
Typically when you sell a UK property you must file a report with HMRC and pay the tax within 60 days of the sale. This will also require an estimate of which tax band you will fall into for the current tax year – as capital gains tax rates vary by income level.
Failing to do so may result in penalties and interest charges.
This information must then be also entered on your self-assessment tax return at the end of the current tax year – however you receive a credit for any tax already paid.
Please see our fully compressive article on your requirements to submit a 60 Day CGT Return after sale of residential property.
Frequently Asked Questions on Capital Gains Tax
How and when do I report and pay Capital Gains Tax?
If you need to pay CGT on the sale of an investment residential property, you must report and pay the tax within 60 days of the sale. Failing to do so may result in penalties and interest charges.
Are there any situations where I do not need to pay Capital Gains Tax?
You do not need to pay CGT in certain situations, such as gifts made to your spouse, civil partner, or a charity. Additionally, you may be eligible for tax relief if the property is a business asset, or if a dependent relative occupied the property. You should seek expert advice if you are unsure.
Can I offset losses against my gains for Capital Gains Tax purposes?
Yes, you can offset capital losses against your gains in the same tax year or carry forward losses to offset against future gains. However, you cannot carry back losses to offset against gains from previous tax years.
How can I reduce my Capital Gains Tax liability?
There are various ways to reduce your CGT liability, such as utilising the annual allowance, offsetting capital losses against gains, undertaking enhancement expenditure on the property, or taking advantage of various tax relief schemes where applicable. Any accountancy and legal fees can generally also be deducted from your calculation and should not be forgotten.
Conclusion
Understanding and complying with your tax obligations when selling an investment residential property is crucial and without due care or expert advice can cause you to incur attention and penalties from HMRC.
Be sure to calculate your gain accurately, report the sale within the required timeframe, and pay any applicable Capital Gains Tax.
If you are unsure about your obligations or need assistance with the process, it is recommended that you consult a qualified accountant or tax professional to ensure you meet all legal requirements
