Capital Gains Tax: What You Need to Know

Why Capital Gains Tax?

Capital Gains Tax (CGT) can be particularly complex when it comes to property transactions, especially if you're selling something other than your primary residence. While many people are aware that CGT is due when selling a second home or an investment property, the nuances of how the tax is calculated and the various reliefs available can be challenging to navigate.

What Triggers Capital Gains Tax on Property?

CGT on property is triggered when you sell, gift, or otherwise dispose of a property that is not your main home. This could be a second home, a rental property, or even land. The gain is calculated by subtracting the property's original purchase price (along with any allowable expenses, such as the costs of buying, selling, or improving the property) from the sale price. The resulting profit is subject to CGT.

Understanding Private Residence Relief

Private Residence Relief (PRR) is one of the most significant reliefs available to property owners. If the property you are selling has been your main home for the entire period of ownership, PRR can exempt the entire gain from CGT. However, if the property was not your primary residence for the entire period, or if part of it was used for business or rental purposes, then only a portion of the gain may be exempt.

For example, if you rented out your property for a few years while you lived elsewhere, PRR would apply only to the years you lived in the property as your main home. The remaining years of ownership, when the property was rented out, would be subject to CGT.

Letting Relief: Limited But Valuable

Letting Relief was a valuable relief for many homeowners who rented out a property that was once their main residence. However, changes introduced in April 2020 significantly restricted its availability. Now, Letting Relief is only available if you share occupancy of the property with a tenant. Even then, the relief is capped at £40,000.

For example, if you lived in your property for a few years, then rented it out while living elsewhere, and finally moved back in before selling, the portion of the gain attributable to the rental period could be reduced by up to £40,000. However, with the new restrictions, many property owners find they no longer qualify for this relief, leading to higher CGT bills.

CGT Rates for Property

The rates of CGT on property are higher than those for other assets. For basic rate taxpayers, the CGT rate on property is 18%, while higher and additional rate taxpayers pay 28%. This can significantly impact the final amount of tax owed, especially on high-value properties.

Reporting and Payment Deadlines

Another area where property CGT can become complicated is the reporting and payment deadlines. Since April 2020, any taxable gain on UK residential property must be reported and the tax paid within 60 days of the sale. This is a much shorter timeframe than for other types of assets, where CGT is reported and paid through the self-assessment tax return process. Failing to meet this deadline can result in penalties and interest charges.

Planning Ahead to Minimise CGT

Given the complexity of CGT on property, careful planning is essential. Strategies such as timing the sale to make the most of your annual CGT allowance, taking advantage of any available reliefs, or considering the impact of future tax changes can all help reduce your liability.

At AWS Accountants, we understand the intricacies of CGT on property and can guide you through the process to ensure you are fully compliant while minimising your tax liability. Whether you're selling a second home, an investment property, or dealing with more complex situations like property gifting or inheritance, our expert advice can help you navigate these challenges with confidence.