Selling a property can be a stressful experience, not only when navigating the property market and estate agents to sell your property but also the process of boxing up your belongings ready to move, and therefore also getting to grips with the tax system can sometimes feel like another burden!

In this post, we will explore the circumstances when tax is due on selling a property.

What is Capital Gains Tax?

Capital gains tax is a tax payable in certain circumstances when an asset, such as property is sold for a higher value than for what it was originally purchased.

The element that can be taxed is the ‘gain’ of the transaction, for example, the uplifted market value of the asset minus any significant costs of renovations and the selling fees.

Capital Gains Tax – Private Residence Relief

There are exemptions to paying Capital Gains Tax should the property be the owner(s):

• Only residence and he/she/they have lived within it for the whole time they have owned it

And that the property has:

• Not been partially let out
• Not been exclusively used for business purchases
• The size of the property is under 5,000 square meters
• Not been purchased in order to make a gain

If all of the above criteria have been met, the private residence relief should apply, granting a full exemption so no capital gains tax is payable.  Typically, capital gains tax is not paid when selling a main residential home within most circumstances.

However, there may be situations where the private residence relief is reduced such as if the homeowners have lived away from home for a period of time.

In this scenario, all homeowners are exempt from paying tax on the last nine months of ownership, and there may be other durations of time that may be exempt if the property was being built or renovated.

In this scenario, please refer to the guidance notes on the government’s website or seek further advice from a personal tax specialist.

Which Property is Deemed the Main Residence?

In the case where someone owns more than one property, a nomination can be made to apply for main residence status.  In most circumstances, for tax efficiency purposes, it is often sensible to nominate a property that the largest gain is expected, as the homeowner’s main residence.

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How is Capital Gains Tax Calculated Should it be Payable?

In a situation where the property owner does not qualify for the full private residence relief, the capital gains tax calculation will be based on a number of factors.  The first step of calculating any tax payable will be to establish the amount of the gain from the sale of the asset.

The gain is commonly the difference between what was paid for the asset, and what the asset has sold for, however, there is a range of scenarios where the market value is used instead.

For further details, please either review the notes on the government’s website or call the government’s capital gains tax helpline.  If there are still queries, please seek expert assistance from a personal tax specialist.

Once the gain has been calculated, a range of costs can be deducted including estate agents and solicitor’s fees, the costs of any improvement works or major renovations.  However, the costs of general maintenance, painting and decorating are not eligible deductions.

There may also be tax reliefs that can be deducted from the gain calculated in certain situations such as lettings relief. For further information on possible tax reliefs please refer to the government’s website, contact HMRC directly or seek professional assistance.

What Tax-free Allowances and other Deductions can be Accounted For?

Once the net gain is calculated as per the process above, the next step would be to deduct the applicable tax-free allowance, which for the financial year 2021/22 is as follows:

• For an individual, a gain of £12,300 can be earned tax-free
• For couples that jointly own assets, the allowance is doubled allowing a tax-free gain of up to £24,600

The allowances above cannot be carried forward between differing tax years and therefore are lost if not utilised.

In addition to the tax-free allowances, in some circumstances, losses from selling previous assets can also be offset against the net gain.

This is a common process for landlords with a property portfolio where losses sometimes occur, and such losses can be claimed for up to four years after the transaction took place.  Any losses would need to be claimed via the self-assessment process.

How is Capital Gains Tax Charged?

Once the tax-free allowances and any previous eligible losses are deducted from the net gain, the calculation of the level of tax to be charged can be completed.

The level of capital gains tax will depend on the homeowner’s personal financial circumstances and tax banding.  The current rates are:

• Basic rate taxpayers would be charged 18% on gains made when selling a property
• Higher-rate and additional-rate taxpayers would be subject to a 28% charge on the gain made on selling a property.

To aid with the calculation of the capital gains tax, there is a free tool available for use on the government’s website.

If Capital Gains Tax is Due, When Should it be Paid by?

Any capital gains tax due on a property transaction must be paid to HMRC within 30 days of the completion of the property sale.

Summary

During this article we have explored the criteria in which private residence relief can be applied to the gain achieved from a property sale, therefore resulting in no capital gains tax payable.

We have also explored a couple of scenarios where the private residence relief may be reduced or not applicable at all.  The process of calculating the capital gains tax due has also been discussed.

For further advice, specific to your circumstances please seek professional advice from an accountant or tax advisor.

If you’d like to find out more about how Ashtons can help you contact one of our branches for further information.