The amount of Capital Gains Tax you pay depends on the level of profit you have made on the sale. However, not all sales are included as there are exemptions.
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What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax that is applied on profit you ‘gain’ when you sell or dispose of an asset that has increased in value. It is the ‘gain’ that is taxable (i.e.: profit) not the entire amount of money you receive.
For example: You purchased a house at £100,000 and you later sell that house for £130,000. The amount that is subject to Capital Gains tax is £30,000 – as the ‘gain’ on your house sale is £30,000. (ie: £130,000 minus £100,000).
Will I have to pay Capital Gains Tax on my property?
You do not have to pay Capital Gains Tax if you make a profit when selling your own home, nor if you are selling a car. You typically are required to pay the tax on:
The sale of a second property or buy to let shares.
The sale of a business
The sale of valuables, such as jewellery, antiques or art pieces.
The amount of Capital Gains Tax you pay depends on the level of profit made on the sale; not all sales are included as there are exemptions. The rate of CGT you are charged depends on whether you pay the basic tax rate or the higher tax rate. Calculations also vary depending on what the current rates of tax are for that particular financial year.
The CGT paid on a property could vary depending on how the property was purchased and when you sell it if its not your primary residence, for example:
Buy to let properties
Business / warehouse premises
An inherited property
If you purchased a property as a ‘joint ownership’, you have to work out what the gain is of your initial investment and work our your share of what you own. Ie: if it was a 50/50 joint ownership, you pay 50% of the CGT of the profit.
If your ‘gains’ from the sale/disposal of the asset are more than your Government allowances, you have to declare and complete a report and pay the CGT owed.
The gov.uk site has up-to-date information on CGT allowances and payments if you need more help and avoid penalties trying to avoid paying capital gains tax.
How can I reduce the amount of Capital Gains Tax I pay?
The Government set allowances each tax year before you charged CGT. You can’t avoid Capital Gains Tax completely, but there are things you can do to reduce the amount Capital gains owed.
Once you have worked out your ‘gain’ on the property, deduct any costs that you have paid with regards to buying and selling, ie: estate agent fees, solicitor fees, broker fees, stamp duty when buying the property or any improvement cost, such as an extension.
Be smart with your allowances
The CGT allowance for 2020-2021 is £12,300 per individual person, and rises to £24,600 for a couples allowance (married or civil partnership). Even children get CGT allowance. Allowances can’t be transferred from one year to the next – so it’s a case of use it or loose it.
If your asset, a property, is owned jointly, you can use both of your allowances together before CGT is owed. Just be careful as if you choose to transfer any of your assets to your partner, bear in mind you will still be charged CGT based on the gain that was made during the period when you owned it as a couple, so you can’t avoid paying completely. It’s also worth transferring to a spouse/partner if their tax bracket is lower than your own.
Offset losses against gains
Gains and losses can be offset against each other in a financial year. Therefore, when you report a loss, the amount is deducted from the gains you have made in that tax year. Just make sure the losses have been registered and reported to HMRC as allowable losses.
Lower your taxable income
The rate of CGT you pay depends which tax band you are in, ie: lower or higher rate. So, by reducing your taxable income can in turn lower the amount of CGT you would pay. You can do this for example, by increasing pension contributions under salary sacrifice, upping the amount you give to a charity, paying childcare through childcare voucher scheme or deferring your state pension.
Get an ISA
Over 19 million people in the UK have an ISA. An ISA allows you to put £20,000 into an ISA account of cash or a stocks and shares (or combination of both) each tax year and any gains made inside an ISA are not subject to CGT.
Can I avoid paying Capital Gains Tax on my property?
Put simply, you can. However there are a number of criteria that you must reach in order to avoid having to pay it.
The property you are selling must be the primary and only residence of the person looking to sell for the entire time they have owned it.
If you own more than one property, you have to choose which one will be ‘tax free’ and not subject to CGT. It doesn’t have to be the property where you spend most of your time and you can pick the one you would make the biggest gain on if you sold it to avoid paying CGT on your property.
The property must have been used exclusively for residence and not for business. This may become more difficult to negotiate over time, especially as a result of the Covid-19 pandemic as more and more people work from home.
The size of the property
The property must be less than 5,000 square meters, including the garden and any additional buildings.
Not purchased for gain
It has to be evident that the property was not a cash-grab or house-flip and that it was bought specifically to live in rather than as an investment opportunity, for example.
Private Residence Relief
In most cases, you won't need to pay CGT when selling the property you live in, because you will be entitled to 'private residence relief'.
You get ‘private residence relief’ and do not pay Capital Gains Tax when you satisfy all of the criteria below:
your home has been your only or main residence throughout your period of ownership
you have not been absent, other than for an allowed period of absence or because you’ve been living in job-related accommodation, during your period of ownership
the garden or grounds including the buildings on them are not greater than the permitted area.
no part of your home has been used exclusively for business purposes during your period of ownership - this includes working from home using a room that is not exclusively used for business purposes.
If you meet all the above conditions, you can avoid paying Capital Gains Tax on your UK property. You can check all the conditions of the ‘private residential relief’ on the gov.uk website.
Is avoiding Capital Gains Tax illegal?
All tax must be paid and if you are unsure you must check with the gov.uk website. The government do provide tax breaks and allowances, providing you meet the correct criteria, so check your eligibility via their website.
If I own land that exceeds 5,000 square feet, do I still need to pay Capital Gains Tax?
Yes. The measurement is the building you live in and the land it is on and is owned by the seller. If the total exceeds 5,0000 square feet, you will need to pay CGT.
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