There are several UK property taxes that may be paid when buying or selling a domestic residence in England. These include Stamp Duty Land Tax (SDLT), Annual Tax on Enveloped Dwellings (ATED), Capital Gains Tax (CGT), Inheritance Tax (IHT), and some others (e.g. Land Transaction Tax in Wales).
While Stamp Duty is probably the most widely known, Capital Gains Tax is a significant concern for anyone who invests in property as an asset, rather than as a primary residence.
Whereas SDLT is paid by the buyer, CGT is paid by the seller. As such, if you are selling one property in order to buy another, you face the risk of being ‘double taxed’ both on the profit you make on your old property, and on the SDLT-rated value of your new purchase.
You can download a full guide to associated costs in property transactions here, or take a deeper look at Capital Gains Tax and its implications below.
Capital Gains Tax, written as CGT for short, is a tax paid by the seller when disposing of an asset that has increased in value since it was purchased; literally, a tax paid on the gained capital.
This is an asset tax, rather than a property tax. It is also paid on other assets, such as art, fine wine, or anything that is purchased as an investment with the intention of gaining value.
CGT was introduced in 1965 under the Labour Chancellor of the Exchequer, James Callaghan, who went on to become Prime Minister in 1976-79. Initially inspired by rapid post-war property price increases, CGT receipts are now worth around £10 billion annually to the UK economy, according to Statista.
There are some allowances and exemptions under the modern CGT regime. In 1977, a £1,000 tax-free allowance was introduced for the first time for individuals, with a £500 allowance for capital gains made by trusts. By 2020-21 this had increased to become the Annual Exempt Allowance of £12,300 for individuals and £6,150 (still a 50% equivalent) for trusts.
Importantly, Capital Gains Tax on property usually does not apply to an individual’s primary residence. There are certain criteria to qualify for this exemption – we’ll look at those in more detail below.
You should also be aware that CGT is owed when ‘disposing of’ an asset. This includes selling for a profit, but also certain other methods of disposal, such as:
For property investors, whether you have a second home, a buy-to-let property or a substantial portfolio, it is important to know whether CGT will be charged on your transaction, as this can significantly impact the after-tax proceeds you receive for the sale.
In general, CGT will apply unless the property is your primary residence. You may qualify for Private Residence Relief if you can demonstrate that ALL of the following criteria are met:
If you qualify for Private Residence Relief, you do not have to do anything – you receive the relief automatically. However, it is important to check whether you might be liable for some or all of the CGT payable on the transaction, if there is any doubt at all.
Our clients have access to a trusted network of financial and tax advisors, who can make certain of whether you should pay any Capital Gains Tax on your sale and explain any other UK property taxes, exemptions and allowances for which you may qualify.
As mentioned above, there is an exemption on Capital Gains Tax if the property was your primary residence for the entire time you owned it, has not been used for business purposes, has not been let out, and is less than 5,000 square metres in total land size.
There is also an exemption when donating property to charity, unless you sell to a charity at a profit. You can give property to your spouse without incurring any CGT, but if they sell it at a later date, they will have to pay the CGT dating back to when you first bought the property, rather than the date you transferred it to them.
Because CGT is charged based on capital gains, there should be nothing to pay if you dispose of property at a loss – worth remembering during a downturn in the UK property market.
As well as the exemptions already mentioned, it is useful to know that CGT is usually not paid on properties inherited as part of a deceased’s estate.
CGT will be paid at a later date if you dispose of the property – and may be owed immediately if you decide to sell the property and divide the proceeds between multiple beneficiaries – but is not an immediate cost incurred when inheriting a property.
However, depending on the total size of the estate, you may have to pay Inheritance Tax (IHT) on the value of the property. Black Brick can refer you to leading tax and finance advisors to determine whether you owe IHT on an inherited property during probate.
If your transaction is subject to Capital Gains Tax, you will need to know the following:
On property transactions completed prior to April 6th 2020, CGT had to be reported by December 31st after the end of the relevant tax year. For instance, for a sale completed on April 5th 2020, the CGT report should have been filed by December 31st 2020.
Since October 27th 2021, CGT must be reported to a Capital Gains Tax on UK Property Account via the HMRC Tax Service on GOV.UK and any CGT owed must be paid in full within 60 days of completion.
The process outlined above is the same for non-residents of the UK, who should also use this process to report sales of non-residential UK property or land, mixed-use property (e.g. residential and commercial mixed) and any assets that derive 75% or more of their value from UK land.
Non-residents are subject to slightly stricter reporting requirements, including the need to report sales of UK property even if you make a loss or do not exceed the relevant tax-free allowances and exemptions.
We can direct you to London’s top law and accountancy firms, who will help you meet the relevant reporting requirements when disposing of UK property assets, including PCL properties where substantial gains or losses have been incurred.
CGT rates depend on which Income Tax band you fall into. For Basic Rate taxpayers, the CGT rate is charged at 18% on residential property within the Basic Income Tax band, and 28% above that rate.
For Higher Rate taxpayers, gains from residential property are charged at 28%. Other assets are charged at 20%. If you have any tax-free allowance available to you, you can offset this against property at the 28% rate first, allowing you to make best use of your allowance.
Losses can be offset against gains (e.g. if you sell two properties and only one makes a profit). Significantly, any losses you do not use (in part or in full) to offset can be carried over into subsequent tax years. If in a subsequent year you sell a property at a profit, you can still offset any remaining past losses to reduce your CGT exposure.
There are different rules for non-residents on using past losses to reduce present-day CGT, on which an independent financial expert can advise.
For more up-to-date insight into property tax and its impact on PCL property transactions, please subscribe to the Black Brick market update, our regular analysis of London’s prime property market.
Black Brick cannot advise directly on managing tax in property investment, but we can introduce you to a specialist tax advisor who can.
Our own expert property consultants can then offer wider advice on making or managing a property investment in London.
Contact Black Brick today to discuss any high-value property transactions or PCL property sales you are planning.
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