Selling a property isn’t always as straightforward as hanging a ‘for sale’ sign in the garden and waiting for the money to come in. It often comes with a number of forms, negotiations and is subject to various costs and expenses, one of which is Capital Gains Tax.
You don’t usually pay Capital Gains Tax when you sell your main home. Instead, it’s usually applied to those selling a buy-to-let property or a second home, meaning it’s particularly important for landlords.
To help you work out how it’ll affect you as a landlord, we’ve put together a guide to explain everything you need to know about Capital Gains Tax, including the changes introduced in April 2020.
What is Capital Gains Tax?
Capital Gains Tax is a tax you pay on any profits you make when disposing of an asset, such as a second home or rental property. It also applies to assets you receive as a gift or as inheritance.
The tax only applies to the gains (profit) you make when you sell something you own, and you only pay it on the total gains you make above the tax-free threshold. The ‘gain’ is the difference between the price you paid for something when you bought it and the price you’re selling it for. For example, if a landlord sells a rental property that isn’t their main residence, they’ll pay tax on the difference between the buying and selling price. Or in other words, they’ll pay tax on any profits they make.
What do we mean by ‘disposing of an asset’?
Disposing of an asset usually means selling it, but it could also include:
- giving it away as a gift or transferring ownership of the asset to someone else.
- swapping it for another asset.
- getting compensation for it – like a landlord insurance pay-out for a destroyed item.
How much Capital Gains Tax do I need to pay?
o work out how much Capital Gains Tax you need to pay when you sell your property, follow these three steps:h
- Work out the ‘gain’ on your property after you sell or dispose of it. To do this, just subtract the price you bought the property for from the price you sold it for.
- Deduct any allowable expenses, losses and your tax-free allowance from your gain. If your gains are lower than the tax-free allowance, you don’t have to pay any Capital Gains Tax.
- Report your gain and pay your tax straight away using the ‘real time’ Capital Gains Tax service if you’re a UK resident, and in your Self Assessment tax return if you already submit one.
What are the Capital Gains Tax rates and allowances?
For 2019-20, everyone in the UK has a capital gains annual tax-free allowance of £12,300 a year. This means that when you’re selling a buy-to-let property, the first £12,300 of the profit you make is exempt from tax. If you’re married or in a civil partnership, each person has tax-free allowance, which means your allowance as a couple would be £24,600.
|CGT allowance for an individual||£11,700||£12,000||£12,300|
|Couple’s allowance (married or in a civil partnership only)||£23,400||£24,000||£24,600|
The Capital Gains Tax rate on property for a basic-rate taxpayer is 18% for the 2020-21 tax year. For higher and additional-rate tax payers, the Capital Gains Tax rate is 28%.
|Tax bracket||Capital Gains Tax rate on property|
|Higher or additional-rate payer||28%|
What can I deduct from my Capital Gains Tax bill?
s well as the Annual Exempt Amount (tax free allowance), there are a few other allowable expenses that can be deducted from your profits to determine the final amount you’ll pay Capital Gains Tax on.
For example, when buying or selling a property you’ll usually need to pay for things like estate agency fees, solicitor fees or Stamp Duty. You can deduct these fees from your overall profits, and only pay Capital Gains Tax on the remainder.
Similarly, if you’ve made any improvements to the property between buying and selling it, like adding an extension, converting a bedroom or installing double glazing, the cost of the improvements can be deducted from the profits you make as well.
You can’t deduct the costs for the upkeep of the property, like a housekeeper’s salary or for general wear and tear. And you can’t deduct the interest you pay on your mortgage from your bill either.
Work out your Capital Gains Tax bill
If, for example, you bought a buy-to-let property for £100,000 and later sold it for £120,000, your profit is £20,000. Your Annual Exempt Amount (tax free allowance) of £12,300 then kicks in, meaning you only pay Capital Gains Tax on the remaining amount, less any other deductions.
ow much tax you’ll pay will then depend on your income and what tax band you’re in. You can use the government’s Capital Gains Tax calculator to work out exactly what you need to pay.
Do I have to pay Capital Gains Tax?
Do I have to pay capital gains tax?
Capital Gains Tax doesn’t apply in every circumstance, and the rules are different for landlords compared to someone who owns one property and lives in it too.
If you’re a homeowner, you won’t pay Capital Gains Tax when you sell the home you live in. But if you’re a landlord and you own a property that you’re letting out, it’s worth knowing what tax exemptions are available so you don’t end up paying over and above what you owe.
You’ll be exempt from paying Capital Gains Tax if:
- you have one home that you’ve lived in as your main residence for all the time you’ve owned it
- you’ve not let part of it out (unless you’ve only had a single lodger)
- you haven’t used part of the property for business purposes
- the grounds, including all buildings, are less than 5,000 square metres in total
- you didn’t buy it just to make a gain
Most of the above exemption criteria only applies to homeowners. So, if you’re a landlord, you’ll probably need to pay Capital Gains Tax when you sell your buy-to-let property.
Private residence relief, lettings relief and Capital Gains Tax
Private residence relief is a tax relief you get when disposing of your private residence – for example, selling your home. It means that a homeowner selling their main residence doesn’t have to pay Capital Gains Tax. However, it also has implications for landlords who used to live in the property they’re now selling.
Before April 2020, if a landlord sold a home they used to live in before they rented it out, they would be eligible for lettings relief. The first £40,000 (£80,000 if a couple sells the property) of their gain would be exempt from Capital Gains Tax, even if they hadn’t lived in the property themselves for a long time.
From April 2020, however, this lettings relief and other areas of Capital Gains Tax have changed.
How is Capital Gains Tax changing in 2020?
There are four main changes to Capital Gains Tax which came into force in April 2020. The aim is to raise additional tax from the sale of residential properties and to collect this money more quickly than before.
- Lettings relief will now only be available to landlords who are in shared occupancy with a tenant
- Landlords who previously lived in a property but then rented it out are exempt from paying tax on gains accrued during the final nine months of ownership (instead of 18 months)
- Capital Gains Tax must now be reported and paid within 30 days of a property being sold
- The tax-free allowance has increased from £12,000 to £12,300
hat do the Capital Gains Tax changes mean for landlords?
The majority of landlords will be affected by the April 2020 Capital Gains Tax changes. However, ‘accidental landlords*’ are likely to be hit hardest by the changes and could face a larger tax bill. But don’t worry, it’s not all bad news. Landlords will still be able to claim private residence relief for any period the property was their main home, and the tax-free allowance is increasing by £300.
Lettings relief now only applies to shared occupancy landlords
Before April 2020
If a landlord sold a house they used to live in, the first £40,000 (£80,000 if a couple sells the property) of their gain would be exempt from Capital Gains Tax, even if they hadn’t lived in the property themselves for a while.
After April 2020
The £40,000 tax relief (£80,000 if it’s jointly owned) now only apply to landlords in shared occupancy with their tenants, for example a landlord who still lives in the property and simply lets out one of the bedrooms.
The tax-free allowance period has been reduced
Before April 2020
Landlords would get full tax relief for the last 18 months they owned the property, even if they weren’t living there at the time. They wouldn’t pay any tax on gains accrued during that 18-month period.
After April 2020
The seller of the property will now only get a nine-month tax relief, meaning their tax bill will likely be higher.
You now have 30 days to report Capital Gains Tax and pay what you owe
Before April 2020
When landlords sold a residential property, they had to report the sale and associated tax charges on a Self Assessment tax return. Any money owed would follow the same Self Assessment payment deadlines.
After April 2020
Residential property sales must be reported twice, according to Which?. The seller must submit a Capital Gains Tax return to HMRC within 30 days of the sale. If there is any tax due, this must also be paid within the same 30-day window. The sale also needs to be reported on a Self Assessment tax return for the appropriate tax year.
The tax-free allowance has increased to £12,300
Before April 2020
The tax-free allowance for Capital Gains Tax was £12,000.
After April 2020
The tax-free allowance for Capital Gains Tax has increased by £300 to £12,300 for individuals and representatives and £24,600 for couples who are married or in a civil partnership. It’s increased from £6,000 to £6,150 for trustees of settlements.
Before April 2020, you had until the next Self Assessment tax deadline to report the sale of a property and pay the Capital Gains Tax you owed. However, as we’ve mentioned, this is one of the areas impacted by the Capital Gains Tax changes in 2020.
After the 6th April 2020, you’ll need to submit a standalone Capital Gains Tax return and pay what you owe within 30 days of the sale completing. It’s important to remember that both the return and payment are due within the same 30-day period. For example, if you submit the Capital Gains return within 28 days, you’ll have two days to pay what you owe.
If you’re a Self Assessment tax payer, you’ll still need to declare this on your annual return (even though you’ve already declared in the Capital Gains return).