If you own an investment property, you're very probably aware that the Chancellor just asked the Office of Tax Simplification (OTS) to take a look at how Capital Gains Tax (CGT) currently works.
That move has unsurprisingly caused much speculation about what form any changes could take – if they even happen. While it's probably wise to keep an eye on proceedings and maybe also to have some contingency plans in place, the truth is, what's going to happen is by no means certain.
Do I pay capital gains tax on property?
If you sell a property in the UK, you may need to pay Capital Gains Tax (CGT) on the profits you make. You generally won't need to pay the tax when selling your main home. However, you will usually face a CGT bill when selling a buy-to-let property or second home.
You may also need to pay CGT if your home is partly used as a business premises, or you lease out part of your property.
CGT rates on property In the UK, you pay higher rates of CGT on property than other assets.
Basic-rate taxpayers pay 18% on gains they make when selling property, while higher and additional-rate taxpayers pay 28%. With other assets, the basic-rate of CGT is 10%, and the higher-rate is 20%.
Bear in mind that any capital gains will be included when working out your tax status for the year, and may push you into a higher bracket.
All taxpayers have an annual CGT allowance, meaning they can earn a certain amount tax-free. In 2020-21, you can make tax-free capital gains of up to to £12,300 (or up to £12,000 in 2019-20).
Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,600. You can find out more in our guide to capital gains tax rates and allowances. You're not allowed to carry this forward, so if you don't use it, you'll lose it.
How much CGT will I pay? As the name suggests, CGT is only charged on the gains you make, rather than the amount you sell the property for. To work out your gain, deduct the amount you originally bought the property for from the sales price.
Then deduct any legitimate costs involved with buying and selling, such as broker fees, stamp duty, and improvements to the property while you owned it. You can also offset losses when selling other assets, and these can be carried forward indefinitely.
As such, if you have a property portfolio, and make, say, a £50,000 loss when selling one property, that will increase the tax-free gain you can make when selling another. You claim your losses via your self-assessment tax return, or by calling HMRC.
You can claim losses up to four years after they were incurred. For any taxable gains above the tax-free allowance of £12,300 in 2020-21 (or £12,000 in 2019-20), you'll pay the CGT property rates. You can find out more in our guide to capital gains tax rates and allowances.
When is capital gains tax due? For any property sold during the 2019-20, you'll have until the next self-assessment tax deadline on 31 January 2021 to report the disposal and pay the tax owed.
Anyone who makes a taxable capital gain from UK residential property in the 2020-21 tax year will have to pay the tax owed within 30 days of the completion of the sale or disposal.
You'll do this by submitting a 'residential property return' and making a payment on account. What can I deduct from my taxable gain? You're allowed to deduct certain costs involved with buying and selling property from your gain when working out your CGT bill. These include: solicitors and estate agents' fees stamp duty when buying the property. Costs involved with improving assets, such as paying for an extension, can also be taken into account when working out your taxable gain.
However, you're not allowed to deduct costs involved with the upkeep of a property. You're also not allowed to deduct mortgage interest either (though that can reduce the tax you pay on rental income).
Now may be the time to get an up to date on all your investment proprties by calling us today on 020 8445 4008 and speaking to a member of our sales team.
