Selling a property can be a rewarding experience, but it’s essential to consider the potential tax implications. Capital Gains Tax (CGT) is a tax on the profit when you sell an asset that has increased in value. For property owners in the UK, understanding how to manage and potentially reduce this tax can make a significant difference in the overall financial outcome.
At GHLD, we’ve helped many clients navigate these waters, and we want to share some practical strategies that could be beneficial when selling your property.
Understanding capital gains tax
Capital Gains Tax is calculated on the profit made from selling a property, not on the amount of money received. For example, if you bought a property for £200,000 and sold it for £300,000, the gain is £100,000, which is the amount subject to CGT. The UK’s tax rate varies depending on whether the property is your primary residence or a second home. As of the current tax year, the CGT rates for residential property are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.
Making use of your annual exempt amount
Every individual in the UK has an annual tax-free allowance known as the Annual Exempt Amount (AEA). For the current tax year, this amount is £3000. If you own a property jointly with another person, such as a spouse or civil partner, both of you can use your AEA, potentially exempting £6000 of your gain from CGT. This allowance can significantly reduce the tax you owe, so it’s important to utilise it effectively.
Principal private residence relief
One of the most substantial reliefs available to property owners is Principal Private Residence (PPR) relief. If the property you sell has been your main residence for the entire period of ownership, you are usually exempt from paying CGT on the profit. Even if the property was not your main residence for the entire time, you might still qualify for partial relief. For instance, the last nine months of ownership are always exempt, regardless of how the property was used during that time.
Lettings relief
If you have rented out your home at some point, you might qualify for lettings relief, which can further reduce your CGT liability. This relief can cover up to £40,000 of your gain (£80,000 if the property is jointly owned). However, it’s important to note that the rules around lettings relief have changed recently, and it now only applies if the owner shares occupancy with the tenant.
Timing your sale
The timing of your property sale can considerably impact your CGT liability. By carefully planning the sale around your income level, you may be able to benefit from a lower tax rate. For instance, if you expect your income to be lower in the next tax year, delaying the sale could reduce your overall tax rate from 24% to 18%. Additionally, utilising your and your partner’s annual exemptions in different tax years could maximise the tax-free amount.
Offsetting losses
If you have other assets that have decreased in value, you can use these losses to offset the gain made on your property sale. This process, known as loss relief, can help reduce your overall CGT liability. For example, if you made a £10,000 loss on a different investment and a £50,000 gain on your property, you would only need to pay CGT on £40,000.
Reporting and paying CGT on second homes
It’s important to note that if you sell a second home or an investment property in the UK, you are required to report and pay any CGT within 60 days of the sale completion. This rule applies to residential property sales where CGT is due and is strictly enforced by HMRC. ]Failing to meet this deadline can result in significant penalties and interest charges.
To avoid these additional costs, ensure that you have all the necessary information ready and submit your CGT return promptly.
Professional advice and planning
Tax regulations can be complex, and legislation changes can impact your liability. Seeking professional advice is crucial to ensure that you’re not paying more tax than necessary.
By considering these strategies, you can better manage your tax liability and keep more of your hard-earned profit. Planning is key whether you’re selling a second home or an investment property.
At GHLD, we have extensive experience helping clients with their property transactions and tax planning needs. Our team of experts is here to provide personalised advice tailored to your unique situation.
If you’re considering selling a property and want to ensure you’re taking advantage of the available tax reliefs, please contact us.
