A Comprehensive CGT Guide for Homeowners and Investors

Selling a residential property can be a significant financial milestone, whether it’s your family home, a rental property, or a second home. However, understanding the implications of Capital Gains Tax (CGT) is crucial. This guide will break down what CGT is, when it applies, and how you can manage your CGT liability when selling residential property.

What is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax on the profit (or gain) you make when you sell an asset that has increased in value. It’s not the amount of money you receive from the sale, but the gain you’ve made from it.

When Does CGT Apply to Residential Property Sales?

CGT applies to the sale of residential property that is not your main home. Here are some situations where CGT might come into play:

1. Second Homes: If you own more than one property and sell your second home, you will likely have to pay CGT on the profit you make.
2. Rental Properties: If you own a buy-to-let property and decide to sell it, the profit from the sale is subject to CGT.
3. Inherited Properties: Selling a residential property you’ve inherited may also attract CGT, depending on its value at the time of inheritance and at the time of sale.

Information Needed for Calculating CGT

To calculate your CGT liability, you will need the following information:

• Purchase Price: The amount you originally paid for the property, including any purchase costs.
• Selling Price: The amount you sold the property for, after deducting any selling costs.
• Allowable Expenses: Costs related to improving the property (but not general maintenance) and expenses directly related to buying and selling the property, such as legal fees and estate agent fees.
• Annual Exemption: The amount of gains that are tax-free each tax year. For the 2023/24 tax year, the annual exemption is £6,000.
• Your Income and Tax Rate: The rate of CGT you’ll pay depends on your total taxable income. Basic rate taxpayers are charged 18% CGT, while higher rate taxpayers are charged 28% on gains from residential property.

Managing Your CGT Liability

Here are some tips to help manage your CGT liability when selling residential property:

1. Use Reliefs and Exemptions: Make sure to use your annual CGT allowance and explore other reliefs such as Private Residence Relief and Lettings Relief if the property was once your main home and later rented out.
2. Plan the Timing: If possible, plan the sale for a tax year when your income is lower, which may result in a lower CGT rate.
3. Keep Detailed Records: Maintain comprehensive records of the purchase price, improvement costs, and selling expenses to ensure you can claim all allowable deductions.
4. Seek Professional Advice: CGT can be complex, especially with property sales. Consulting a tax advisor or accountant can provide personalized guidance and help you navigate the intricacies of CGT.

How to Report and Pay Capital Gains Tax on Residential Property Disposals

Taxpayers have 60 days to report and pay CGT when they dispose of UK residential property. Here’s a detailed breakdown of the process:

1. Who Needs to Report:
   • The 60-day CGT reporting rules apply to UK residents, including individuals, trustees, personal representatives, partners in partnerships and limited liability partnerships, and joint owners of property.
   • Non-UK residents also have similar rules for both residential and non-residential property disposals.
2. What Disposals Fall Within the 60-Day Rules:
   • The rules apply to disposals of direct interests in UK residential property where there’s CGT to pay. This includes selling or gifting a house, holiday home, or rental property.
3. Exemptions from the 60-Day Reporting Requirement:
   • No CGT to pay (e.g., fully covered by exemptions or reliefs).
   • No gain, no loss transfers between spouses or civil partners.
   • Disposals by charities, pension scheme investments, or as part of a trading business.
4. How to Report Disposals:
   • Disposals must be reported digitally through the taxpayer’s ‘Capital Gains Tax on UK property account’ via the Government Gateway. Taxpayers can report the disposal themselves or authorize a tax adviser to do so.
   • In limited circumstances, a paper ‘Capital Gains Tax on UK property return’ must be used if digital reporting isn’t possible.
5. Paying the CGT Owed:
   • An estimate of the CGT due must be paid through the taxpayer’s Capital Gains Tax on UK property account, or by bank transfer or cheque using a 14-digit payment reference provided by HMRC.
   • The deadline for reporting and paying CGT is 60 days from the completion date of the disposal.
6. Calculating the CGT Payment on Account:
   • A tax computation must be prepared to calculate the estimated tax due, considering the annual exemption and any allowable capital losses arising before the disposal.
   • The final tax position is usually confirmed when preparing the taxpayer’s self-assessment tax return, which may lead to adjustments based on other factors such as losses realized after the property disposal.

Conclusion

Understanding CGT and how it applies to residential property sales is crucial for homeowners, landlords, and investors. By being aware of the rules, keeping good records, and seeking professional advice, you can manage your CGT liability effectively and ensure you’re not paying more tax than necessary.

At BSO-Fintax, we specialize in helping homeowners, landlords, and investors manage their CGT liability effectively. Our team of experienced accountants can provide personalized advice and support to ensure you’re not paying more tax than necessary. Contact us today to learn how we can assist you with your property sale and other financial needs.

Practical Tips

• If you’re thinking of selling or gifting residential property, contact your tax advisor for guidance.
• Where a property disposal results in a loss, you may benefit from filing a return to claim the loss.
• Consider realizing capital losses before disposing of a residential property for a gain to include the losses when calculating the estimated CGT payment on account.
• Ensure you understand whether you’re UK or non-UK tax resident as reporting requirements differ.

By understanding these details and working with a knowledgeable accountant, you can navigate the complexities of CGT on residential property sales with confidence.