Capital Gains Tax on Property – A Beginner’s Guide

Posted 14th February 2022 by ctatax-admin

Capital Gains Tax (aka CGT) is a tax often associated in people’s minds with the very rich, when in fact nothing could be further from the truth. CGT is a tax charged on the sale of certain assets including property, and is levied against the profit (or Capital Gain) made in the course of that sale.

As regards property, the fact that CGT is often quoted as being chargeable against property which isn’t the main residence leads many people to believe that it applies only to Buy To Let (BTL) properties. This is also not true, as CGT is also chargeable on the sale of second homes, land, business premises and even properties which are inherited.

Any investment property you own as a personal investment which you then sell is chargeable to CGT, whether you are employed, unemployed, self-employed or an individual in a business partnership. If the property is owned and sold by a limited company, Corporation Tax will apply rather than CGT.

The exact amount of CGT payable is where things get a little more complex. This amount will depend on certain factors, namely your personal income and the amount of gain made. These two will be added up to calculate the rate at which you will be charged CGT, but that’s not the only consideration on the way to determining your CGT liability.

Firstly, like income tax, CGT on property comes with an annual allowance, i.e. the amount of gain you have to make before the tax becomes payable. For the tax year 2021-22, this threshold is set at £12,300, meaning you have to make a capital gain of more than this on the sale of the property in order for CGT to apply – if you were to have bought a property in 2019 at £150,000 and sold it today at £160,000, no CGT would be chargeable.

Firstly, like income tax, CGT on property comes with an annual allowance, i.e. the amount of gain you have to make before the tax becomes payable. For the tax year 2021-22, this threshold is set at £12,300, meaning you have to make a capital gain of more than this on the sale of the property in order for CGT to apply – if you were to have bought a property in 2019 at £150,000 and sold it today at £160,000, no CGT would be chargeable.

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Secondly, like self-employed income, CGT on property is subject to certain allowable expenses, including Stamp Duty paid on the purchase, estate agent and solicitor fees, costs for improvements made to the property including extensions, internal renovations and the like and various other costs. Thus, you begin to see that there is a lot of accounting to be done to get to the final number.

Thirdly, there are also reliefs which may be applicable, specifically Private Residence Relief and Lettings Relief. The first applies obviously when selling your main residence, but may also provide partial relief if you dispose of a residential property which, while not your main residence, is one that has been your main residence previously. This relief will apply to the time when you lived at the property, as well as the final nine months of ownership, and may therefore have a significant impact on the final liability.

Lettings Relief is more complex, and since 2020 requires not only that the property is let but that you also reside at the property with your tenant at the time of sale. It can lead to up to £40,000 worth of CGT relief if successfully claimed.

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Happily, although CGT on property is payable from the moment it is sold, Since 6 June 2020 the timing of having to report and pay CGT on property sales is different for residential property and commercial property.  Individuals and non-resident sellers (including companies and trusts) have 30 days to report and pay the CGT from the date they dispose of residential property.

For sales of commercial properties the CGT is payable on 31st January following the tax year in which the profit was made.

Where the seller is a UK company the profits from both residential property and commercial property is subject to corporation tax rather than CGT, and this is paid 9 months after the end of the company’s accounting period.

Non UK Company Sellers of residential properties, therefore, may have to consider the available reliefs and allowances as they place the properties on the market, rather than several months later

Of course, if you want to be sure you’re paying what you owe and no more, then it’s always best to seek expert advice. Cornerstone can help with any CGT enquiries you may have on your property, and once you have a full picture of what is (or may become) due, then you may find you have some pleasant surprises in store.