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Business Services  •  Personal tax  •  Property

Understanding capital gains tax on property sales

By RJP LLP on 21 January 2021

In recent weeks we have received a number of queries about capital gains tax due when a property is sold. These enquiries are arising largely because the government commissioned a report on capital gains tax (CGT) from the Office of Tax Simplification, and the contents of that report have raised concerns that the rates of CGT are likely to increase.

This article explains the current tax position relating to UK resident individuals owning UK residential property. Note that for non-UK resident individuals, different rules apply when calculating the capital gain, and advice should be sought on the most beneficial way in which to calculate the gains arising.

Is capital gains tax being reviewed?

As a result of the report, there have been many rumours circulating about CGT increases and whilst this is possible, and even perhaps likely, nothing is confirmed yet.

Do I have to pay capital gains tax when I sell my main home?

There are two aspects to this question. For taxpayers who sell their principal private residence (PPR) and make a gain, there is no capital gains tax to pay if they have lived in it throughout the period of ownership. In this case, any amount of gain can be made with no CGT payable.

If you move out of your PPR in order to move into a replacement PPR, but continue to own your previous PPR, the last 9 months of ownership of that previous PPR will remain free form CGT under current legislation.

If capital gains tax (CGT) is due on a property sale, it must now be paid in full within 30 days of the date of completion. This became effective on 6 April 2020, replacing the previous rules that any tax due must be paid on 31 January following the tax year in which the disposal took place. In addition, a return also needs to be filed with HMRC during the same 30-day time period.

Also note that if capital gains tax is payable when an asset is sold for a gain, there are 4 potential rates of tax, depending on income levels.

  • 10% tax rate – applies to lower rate taxpayers selling non property assets;
  • 18% tax rate – applies to lower rate taxpayers selling residential property;
  • 20% tax rate – applies to higher and additional rate taxpayers selling non property assets;
  • 28% tax rate – applies to higher and additional rate taxpayers selling residential property.

Therefore, if you are a higher rate taxpayer and are selling property which triggers a CGT liability, you will be required to pay 28% tax on gains within 30 days of disposal and file an appropriate return with HMRC.

If you are planning to sell a property in the near future, it is useful to seek professional tax advice, to understand what information is required to calculate the gain arising and to be able to complete the online report within the necessary time limit.

Having advance warning of the tax liability will also help to ensure that the appropriate funds are reserved from the proceeds of the sale to pay the CGT.

For more advice on property tax please email us at partners@rjp.co.uk

 

 

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30 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 30 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.