Capital Gains Tax (CGT) is classed as a levy which needs paying once a second home or a buy-to-let property has been sold. If a property has been owned for a period of time, the value has increased and is then sold there is then a tax to be paid. The fee is calculated based on a gain which is calculated by the difference between the purchase price and the sale price.
Capital gains tax will apply to any of the following properties
- Second home – any additional property that is not the main residence
- Buy-to-let properties – purchased for the sole purpose of being rented out
- Inherited properties – received through inheritance so considered a second home
There are a number of steps involved on how capital gains tax is calculated:
Gain – calculated by subtracting the cost of the property from the sales value. It is important to note that associated purchase costs such as legal fees and stamp duty need to be included in these figures, whereas the costs of selling such as estate agent fees and legal fees should not be included.
Allowable deductions – if considerable work has been undertaken to the property for renovation and improvement, which in turn have increased the property value, then these costs can be reduced from the gain.
Exemptions – As it currently stands the capital gains tax will only apply when the gains are over £6,000. An individual is allowed a CGT allowance of £6,000 for the current tax year.
Tax rates – a basic rate taxpayer whose income falls within the standard tax band will have to pay 18% tax on their gains. A higher rate taxpayer will have to pay 28% on their gains.
Once the residential property has been sold, HMRC must be informed and the capital gains tax paid. There is only a 60-day window from the date of the sale to filing of the paperwork and payment being made. If this deadline is missed, then penalties and interest charges could occur.
Finally, there is some financial relief available that can have an impact on the capital gains tax liability:
- If owners have lived in the property for its entire ownership, then no capital gains payment is required
- If the property has been rented, then owners could qualify for letting relief up to the value of £40,000. This can be offset to reduce the capital gains payment.
- When in a marriage or civil partnership assets such as property can be transferred between spouses or partners so strategic planning can take place to again reduce the tax liabilities.
To summarise, capital gains tax can have a significant impact on the profitability of a residential property being sold. Being able to understand this and recognising what can be undertaken to reduce the liabilities is essential before the sale is completed. It is always recommended to speak to tax experts during this period.
If you have any questions or would like to discuss capital gains tax further, please call our team on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
You can also book a free 20-minute call with Yarka – https://calendly.com/yarka-ssa/20min
