Capital Gains Tax is just one of the taxes property investors need to be aware of.
It can apply to anyone who has made a profit through the selling (or disposing) of a secondary property – i.e. one that the owner doesn’t live in.1
This can include:
- Buy-to-let properties
- Commercial properties
- Inherited properties
People who wish to sell their primary home are not affected – this is known as Private Residence Relief.2
In what circumstances do I NOT need to pay Capital Gains Tax?
There are other circumstances in which you may not be required to pay tax on Capital Gains. For example, if you present your property to your husband, wife, civil partner or charity as a gift, then it’s unlikely that you will need to pay.1 Likewise, if the property was occupied by a relative considered to be a ‘dependent’, you may also be exempt.3 Capital Gains Tax can also be reduced, if not completely eradicated, when you sell a property that was used for your business.1 Capital Gains Tax may also be reduced for the period when it was your principal private residence, if you rented it afterwards.
Finally, in certain situations, it’s also possible to pay no Capital Gains Tax when your sole purpose is to buy and sell property. See the gov.uk page on business exemptions for more details.
In these situations, property investors may pay no Capital Gains Tax, but instead pay Income Tax or Corporation Tax. Speak to an independent financial advisor before committing to any investment.
How much is Capital Gains Tax?
The amount you will be taxed depends on the profit (i.e. “gain”) made on the property. To work out the gain, simply detract what you paid for the property from the total amount you received when selling the property.3 However, there are some occasions where you will need to use the market value of the property instead:
- Property was given as a gift (other than the exemptions previously described (use the market value as of the date of gift)
- Property has been owned since before April 1982 (use the market value as of 31 March 1982)
- Property was sold for less than what it was worth (use the market value as of date of sale)
- Property was inherited (use the market value as of date of death of previous owner)3
Once you have a gains amount, you can deduct certain types of expenses, including:
- Fees paid to estate agents and solicitors
- Money spent on making improvements to the home (things such as adding an extension or conservatory. Regular redecorating does not count).3
Allowance and Capital Gains Tax Rate
Once any deductions have been made, and you have a final “gain” amount, you can begin to figure out how much you will be taxed. In the UK, an allowance is made for the first £11,100. If an asset is jointly held by you and your spouse you may both have this allowance on any potential gain. The rest of your “gain” will be taxed at either 10% or 20%.
The gov.uk website explains how this is calculated.
It’s important to note that you should always consult an independent financial advisor before proceeding with an investment.