Understanding Capital Gains Tax When Selling a Property in the UK

When selling a property in the UK, it’s essential to understand how Capital Gains Tax (CGT) may apply to the profits you make. Whether you're a landlord, investor, or someone selling a second home, navigating CGT can be complex. At Redwood Accountants (Rugby), we specialise in helping property owners understand and manage their tax obligations, including CGT, to ensure compliance and minimise tax liabilities. In this blog, we'll explain what CGT is, when it applies, and how we can assist with your property sale.

What Is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax you pay on the profit you make when you sell or "dispose of" an asset that has increased in value. For property sales, this generally refers to selling or gifting a property, transferring it to someone else, or exchanging it for another asset. It’s important to note that CGT is only applied to the profit made—not the total sale price.

For example:

• If you bought a property for £200,000 and later sold it for £300,000, the gain would be £100,000. CGT is calculated on that £100,000 gain.

When Does CGT Apply to Property Sales?

CGT doesn’t apply to every property sale. In many cases, your main home (or "principal private residence") is exempt. However, the tax may apply in the following situations:

1. Selling a Second Home
   If you're selling a second home, holiday home, or rental property, the profit is generally subject to CGT.
2. Inherited Property
   If you’ve inherited a property and then sell it, CGT may apply, although the base value is typically calculated as the market value of the property at the time of inheritance.
3. Selling an Investment Property
   For buy-to-let landlords or those who have purchased property as an investment, any gains made on the sale are subject to CGT.
4. Selling Business Premises
   If you're selling a commercial property or business premises, this may also trigger a CGT liability.

CGT Rates on Property Sales

The CGT rate you pay on a property sale depends on your income and whether you are a basic-rate or higher-rate taxpayer. The rates are as follows:

• 18% for basic-rate taxpayers
• 24% for higher and additional-rate taxpayers

To determine which rate applies, you need to add the profit (capital gain) to your income for the year. If the combined total pushes you into the higher-rate bracket, you’ll pay the higher CGT rate on the portion of your gain that exceeds the basic-rate threshold.

CGT Allowance

Each individual has an annual CGT allowance (called the Annual Exempt Amount). For the 2024/25 tax year, this allowance is £3,000 for individuals. This means you can make gains up to this amount before any CGT is due. Couples who jointly own a property can combine their allowances, effectively doubling the tax-free amount.

For example:

• If you sell a rental property and your gain is £30,000, and you are entitled to the £3,000 allowance, you’ll only pay CGT on £27,000 (£30,000 - £3,000).

Deductions and Reliefs

There are several ways to reduce the amount of CGT you pay when selling a property, including:

1. Private Residence Relief (PRR)
   If the property was at any point your main residence, you may be eligible for partial relief on the period it was your primary home. Additionally, the final 9 months of ownership are exempt from CGT, even if the property was not your main residence during that time.
2. Lettings Relief
   Lettings relief is available to those who sell a property that was once their main residence and was later rented out. This relief can reduce your taxable gain by up to £40,000 but is subject to certain restrictions and conditions.
3. Costs You Can Deduct
   Certain costs incurred when buying, selling, or improving the property can be deducted from the gain. These may include:
   • Stamp Duty Land Tax (SDLT) paid when purchasing the property
   • Legal fees
   • Estate agent fees
   • Costs of improvements (but not routine maintenance or repairs)

Reporting and Paying CGT

From 2020, new rules require that if you sell a UK residential property and CGT is due, you must report and pay the tax within 60 days of the sale. Failure to do so can result in penalties and interest on any unpaid tax. Accurate record-keeping is essential to ensure compliance and to calculate your liability correctly.

How Redwood Accountants (Rugby) Can Help

Selling a property can be a complex process, especially when considering the tax implications. At Redwood Accountants (Rugby), we offer expert advice and guidance on CGT, helping you navigate the process smoothly. Here’s how we can assist:

• Accurate CGT Calculation: We can help you determine how much CGT you owe by calculating the gain, applying available deductions, and ensuring all reliefs are considered.
• Tax Planning: We provide tailored tax planning strategies to help minimise your CGT liability, including the best time to sell, whether you qualify for any reliefs, and how to use your annual allowance effectively.
• Assistance with Reporting: We can assist you in reporting your gain to HMRC within the required timeframe and ensure that all paperwork is submitted accurately to avoid penalties.

Conclusion

Understanding Capital Gains Tax when selling a property is essential to avoid unexpected tax liabilities and penalties. Whether you're selling an investment property, a second home, or an inherited estate, careful planning and expert advice can help minimise your tax exposure. Redwood Accountants (Rugby) is here to guide you through the complexities of CGT, ensuring you stay compliant while protecting your financial interests.

Contact Us: If you are selling a property and need advice on Capital Gains Tax, contact Redwood Accountants (Rugby) today. Let us help you manage your property sale with confidence and clarity.