How Does Capital Gains Tax Work on Property?

How Does Capital Gains Tax Work on Property?

25 August 2020 Simon Banks Read time: 2 min
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Simon Banks

Property investment can be a rewarding venture for savvy landlords. With short term gains in the form of passive rental income and long-term appreciation as your capital asset grows, you could say it's a bit of a win-win - even with the changes to tax on mortgage relief over the years.

However, like anything where you can earn money, there's tax to pay. Not only do you need to pay tax on your rental income if it's above the UK threshold of £12,500; you also need to pay tax on the profits you make when selling the property. This is called capital gains tax (CGT).

So much tax. Tax everywhere. While it might be impossible to avoid paying the necessary tax, it does help if you understand how capital gains tax works and how it affects you. That's why we've put this guide together, giving you the lowdown on everything you need to know about capital gains tax.

What is capital gains tax?

Capital gains tax is the amount of tax you pay on the profits you make after a property sale. It doesn't apply if you're selling your own home, and instead relates to buy-to-let properties and second homes.

Capital gains tax explainer

Your CGT bill is higher on bricks and mortar than any other type of asset. Basic tax-rate payers are required to pay 18 percent on gains they make when selling a property, while higher and additional taxpayers need to fork out 28 percent.

How much capital gains tax do you need to pay?

Capital gains is only charged on the amount you make, rather than how much you sell the property for. Therefore, if you sell the property for the same price as you bought it, there won't be any capital gains tax to pay - though that sort of defeats the point of investing in a long-term asset. 

You can also make deductions from the final sale price, such as agent broker fees, improvements to the property while you owned it, stamp duty and solicitor fees. These elements aren't included in the tax and are deductible from the final price when calculating your gains.

Are there any capital gains tax allowance breaks?

Every taxpayer has an annual CGT allowance, which means they can earn a certain amount of money tax-free. Capital gains are worked out when calculating your tax status for the year-end, and could even move you into a higher tax bracket.

Capital gains tax in scrabble

Fortunately, taxpayers have an annual CGT allowance that lets them make tax-free capital gains of up to £12,300. Couples who own assets together can potentially get an allowance of up to £24,600. However, you can't carry it forward, which means it only relates to each tax year. There's no accumulation of allowance.

When is capital gains due?

Previously, you weren't required to pay capital gains tax on completion of the property until the latest tax assessment. For example, the bill for a property sold in the 19-20 tax year wouldn't be due until the self-assessment tax deadline on January 31st 2021.

However, as of the 20-21 tax year, sellers will need to pay the capital gains tax within 30 days of the completion of the sale. You will need to submit a "residential property return", making the correct payment into the account.

Give me the gains

Capital gains tax might be a bit of a pain, but think about it like this: if you need to pay, it means that your property has increased in value over the years. And all the while it was collecting rental income, whether through long or short-term lets. Even with the percentage you need to pay, there are still profits up for grabs, especially if you made a savvy investment that increased significantly during your time as the owner.

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