When it comes to selling a property, something you’ve got to consider when calculating your financial situation is how much Capital Gains Tax (CGT) you will need to pay.
CGT are something you have to pay on any asset that you sell for a profit. Assets can include personal possessions worth over £6,000 (excluding your car), shares and investments that are not in an ISA or PEP, business assets and property. In this blog, we’ll be looking at how you can avoid paying CGT when it comes to selling a property.
What is Capital Gains Tax (CGT)?
CGT is essentially the tax you pay on the profit you receive in the sale or the disposing of an asset. It’s important to note that you are not taxed on the value of the whole asset, only on the profit margin you made during the disposing of that asset.
For example, if you bought an asset for £20,000 and then sold it for £25,000, the £5000 profit you made via the sale would be subject to tax, not the entire price of the asset. This is because it is likely that the asset has already been subject to tax at some point prior, so the government only taxes the profit made on the asset.
CGT applies to the ‘disposal’ of assets you make a profit on. The ‘disposing’ of an asset can include any of the following:
- Giving the asset away
- Transferring ownership
- Trading for another asset
- Receiving compensation (for example, insurance payment)
You’ll only need to pay CGT if the profit you make throughout the year exceeds the Annual Exempt Amount (AEA). For individuals, the tax-free allowance is £11,700 and for trusts, the amount is £5,850. If your profits are below these margins, then you won’t need to pay any CGT.
Who pays Capital Gains Tax and what are the rates?
In terms of paying CGT on the sale of a property, you are only required to pay it on any property that is not your main home, with the exception of some specific criteria. For example, if your property has been used for business, has been rented out or is of a significant size, then you could still be subject to CGT even if it’s your main home.
In terms of the rates, a primary ratepayer usually needs to pay 10% CGT on all assets. However, the CGT rates are higher on property compared to other assets. So the same ratepayer needs to pay 18% CGT on all property.
There is also a higher bracket for an additional rate payer. If your overall income including salary and other revenue sources is higher than the £46,350 threshold, then you will be subject to a higher CGT rate. Rate payers in the higher bracket will need to pay 28% CGT on all property, and 20% on all other assets.
When can Capital Gains Tax be avoided?
The circumstances in which Capital Gains Tax can be avoided depend on how the asset is being disposed of. More often than not, the criteria which needs to be met for avoiding CGT will be different when you are selling a property compared to giving it away through inheritance.
Avoiding Capital Gains Tax on a property sale
The main scenarios in which someone can avoid paying CGT on the sale of a property usually occur when a resident is selling their home. In order to avoid the tax, residents selling the property must meet a set of criteria. Firstly, the house must be the primary residence of the seller and the only property that they own. Additionally, if there is more than one owner, parts of the property can’t have been let out to others. The property also can’t have been used strictly for business purposes, so if the property is listed as a business address, the seller will not be able to avoid Capital Gains Tax. The property and the grounds of the property must be under 5000 square metres in order to be able to avoid CGT. Lastly, the seller must be able to demonstrate that the property was not bought with the sole intention of making profit.
If homeowners are able to meet all of the above criteria, they will not be subject to CGT when they are selling their home and will automatically receive a tax break known as Private Residence Relief.
Avoiding Capital Gains Tax on an inherited property
If you have inherited a property, you can often avoid paying any CGT if you sell the property on during the probate period. You also don’t have to pay any Capital Gains Tax on property not sold before the original property owner passes away as they are considered unrealised gains. However, if the property value increases after the original owner passes away, the inheritor will have to pay CGT when the property is sold.
When this scenario occurs, the property is liable to CGT based on how much the property has increased since the original owner passed away. The value of a recently inherited property is known as a probate value. However, the increase in value that occurs during the probate period is usually minimal if not non-existent, which is why it’s considered a good way to avoid paying any Capital Gains Tax on inherited property.
Avoiding Capital Gains Tax on foreign property
As the UK doesn’t require individuals to pay Capital Gains Tax on the sale of a person’s primary residence, you are able to avoid paying CGT on foreign property by declaring that property as your primary home. It’s usually necessary for homeowners to make this declaration within two years of the initial purchase of the foreign property.