When you’re disposing of a property, you’ll have to take certain things into consideration, from choosing an estate agent to sell the home, to deciding how much you want for it. You will also need to take Capital Gains Tax into consideration.
We’re contractor accountants, so we aim to help you understand how this tax works and when you must pay it in order to avoid penalties and interest fees.
What is Capital Gains Tax?
First of all, it’s important you understand what Capital Gains Tax actually is.
This tax rule refers to the profit you make when you sell (or ‘dispose of’) an asset that increased in value. For example, if you bought an investment property for £120,000 and it later sold for £150,000, you made a gain of £30,000 – in essence, you pay tax on the gain you make, not on the amount of money you received.
When it comes to Capital Gains Tax, ‘disposing of’ an asset can mean selling it, giving it away as a gift or transferring it to someone else, swapping it for something else, or getting compensation for it (for example, an insurance pay-out).
Private Residence Relief
While it’s true that you must pay Capital Gains Tax when disposing of a property, this is more directed at landlords than private homeowners. This is because you’re entitled to something called Private Residence Relief if you meet certain criteria.
This Private Residence Relief means you won’t have to pay Capital Gains Tax if the following applies when selling or disposing of your home:
- You only have one home and you’ve used it as your main home since it came into your possession.
- You’ve not let any part of it out (though this doesn’t include lodgers).
- You’ve not used part of the home for business only.
- The ground and any buildings within are less than 5,000 square metres in total.
- You didn’t buy the home just to make a profit.
If you can’t meet all these requirements, you may have to pay some tax. If you’re married or in a civil partnership, you can only count one property as your main home.
Like many other UK tax laws, this can be a complex matter, especially if you’re not sure whether you will have tax to pay – to avoid potential penalties, you can speak to a professional accountant who understands how Capital Gains Tax works and who can give you specialist advice.
Gorilla Accounting will be happy to help, so don’t hesitate to contact us to learn more about your situation.
What About Business Gains?
When it comes to Capital Gains Tax for business, you must pay it if you make a profit when selling a business asset – or part of it. This can include land and buildings, fixtures, plant and machinery, shares and registered trademarks.
This applies if you’re a sole trader or in a business partnership, while limited company owners pay corporation tax on the profits. As sole trader accountants, we can help with this, so let us know if you’re unsure whether you have to pay Capital Gains Tax.
Your Tax-Free Allowance
Just like your income tax, you also have a tax-free allowance when it comes to Capital Gains Tax (called Annual Exempt Amount). In the tax year of 2021/22, your allowance is £12,300 and will remain so until the 2025/26 tax year.
You also don’t typically pay Capital Gains Tax on gifts to your spouse or civil partner or to a charity, just as you don’t pay it on gains from ISAs, PEPs, bets, lottery wins, pool winnings, UK government gilts and Premium Bonds.
You may have the opportunity to delay paying this tax if you incorporate your business. This Incorporation Relief applies when you transfer the business to a company in exchange for shares, and means you won’t pay tax until you sell these shares.
You’re eligible for this relief if you’re a sole trader or in a business partnership and decide to transfer the business. You don’t have to do anything to receive the relief either, as this is something you get automatically.
Capital Gains Tax Rates
If you pay 40% or 45% in income tax (meaning you pay a higher or additional rate), you’ll also have to pay 28% on your gains from residential property and 20% on your gains from other chargeable assets, like shares that aren’t on an ISA or PEP, business assets and most personal possessions worth £6,000 (except your car). These personal possessions include jewellery, paintings, antiques, coins and stamps.
If, on the other hand, you’re a basic rate income taxpayer, the Capital Gains Tax you pay will depend on the amount of the gain itself, your taxable income and the type of asset you made a gain from. So, you’ll have to:
- Figure out the amount of taxable income you have
- Calculate your total taxable gains (work out the gain for each asset, add them together and deduct any allowable losses)
- Deduct your allowance
- Add the amount to your taxable income
You’ll have to pay 18% on residential property and 10% on your gains from other chargeable assets if the resulting amount falls within the basic income tax band.
Deadlines to Keep in Mind
There is no specific time of year to pay Capital Gains Tax, considering each case is different. Still, you have 30 days after the completion date to report and pay your tax on any property disposals after April 2020.
Because of the COVID-19 pandemic, HMRC didn’t issue late filing penalties to transactions completed between 6 April 2020 and 30 June 2020 as long as the gain was reported, and the tax paid, by 31 July 2020.
However, if you don’t pay Capital Gains Tax within 30 days of completion, you’ll be charged interest, as this wasn’t deferred.
Have You Sold Property in the UK Before or After 6 April 2020?
As we mentioned, you have 30 days to report and pay any tax that is due on your property if you sold it on or after 6 April 2020.
To pay, you must have a Government Gateway user ID and password and set up an account. If you don’t have an ID yet, you just need to create one when you sign in for the first time. Through this account, you can report your Capital Gains Tax and see your returns.
But what if you sold your property before 6 April 2020?
According to the government, if you have other capital gains to report but which aren’t from a property sold in the UK from 6 April 2020, you can report and pay the tax immediately or choose to report them in a self-assessment tax return.
If you want to pay right away, you must report your gain by 31 December of the same tax year, and you also need a Government Gateway user ID and password. HMRC will contact you with a payment reference number once you’ve reported these gains.
By choosing to report the gains in a self-assessment return, you can do it in the following tax year instead.
Reporting Capital Gains Tax
In order to report and pay this tax, you need a Capital Gains Tax on UK property account. Once you have it, you can report the disposal of the property, pay any tax owed and view/change previous returns.
To report the gains, you need:
- To calculate each and every capital gain or loss
- All details of how much the asset was bought and sold for
- The dates when you became the owner of the asset and when you disposed of it
- Any other relevant details, including potential tax reliefs
Paying Capital Gains Tax if You’re Not Resident in the UK
If you don’t live in the UK, you may need to report sales of a UK property within 30 days, even if there’s no tax to pay. You may have to pay if you’re not a UK resident, if you represent a non-resident who’s now passed away, if you don’t reside in the UK but are in a partnership, and if you’re a non-resident trustee.
As a non-resident, you must also report your gains under the following conditions:
- Any residential UK property or land you have (this includes any buildings on the land)
- Non-residential properties or land
- Mixed use properties or land
- Rights to assets that get, at least, 75% of their value from land
If you live in the UK but are considered a non-resident for part of the year, you may also have to pay Capital Gains Tax. Unsure whether you’re classed as a non-resident? The UK government takes a couple of things into consideration when it comes to this, so keep in mind you automatically become non-resident if:
- You spend fewer than 16 days in the UK (or fewer than 46 days if you’ve not been a UK resident for the last three tax years).
- You work abroad full-time and spend fewer than 91 days in the UK
As accountants for landlords, we can help you figure Capital Gains Tax out and are on hand to answer any questions you may have about selling your property. We help manage the accounts of countless self-employed individuals, so we know a thing or two about this tax and other property laws, such as Section 24.