The time it takes to buy or sell a house will typically take a few months and will include several steps that must be fulfilled when embarking on this process. This may include arranging a sale through an estate agent and drawing up a legal contract, but both the buyer and seller of the property may also have to pay some form of tax.
Many homeowners forget to factor in the taxes they are liable to pay when selling a house. Although these taxes can vary depending on a range of factors, the main tax associated with selling houses is Capital Gains Tax. This article uncovers everything you need to know about Capital Gains Tax, what it is, how it works and how to know if you owe any tax.
What Is Capital Gains Tax?
Capital Gains Tax (CGT) refers to the gain you’ve made on a property that is taxed. It is a tax on the profit you make from selling a property that has increased in value.
For example, if you bought a house for £250,000 and sold it five years later for £300,00, your gain is £50,000 and this is the amount that CGT is payable on. You will need to work out your gain to find out whether you need to pay tax.
But not everyone is liable to pay this tax and it is vital that, if you are selling a house, you check the rules surrounding eligibility for CGT. For example, you may be exempt from paying CGT if you gift the property to your partner or a charity, or if the gain you have made does not exceed your tax-free allowance for the year.
Additionally, you will not pay CGT if the property is less than 5,000 square meters (just over an acre) in total or if you did not buy the house just to make a gain.
If all of these factors apply to you, you will automatically get a tax relief called Private Residence Relief and will have no CGT tax to pay.
Paying Capital Gains Tax
If any of the factors listed above do apply to you or if the property you are selling is, for example, a business, a buy-to-let property or a second home, it is likely that you will be required to pay Capital Gains Tax.
If you do need to need to pay CGT, you must report and pay any CGT on most sales of UK property within 60 days.
If you are selling property belonging to the estate of someone who has died, you will need to include this information when reporting the estate to HM Revenue and Customs (HMRC) – the department responsible for the collection of taxes in the UK.
How to Work Out Your Capital Gains Tax
Your gain is the amount that CGT is payable on. Your gain is typically the difference between what you paid for the property and the amount you got when you sold it. However, several factors are relevant when working out your gain.
In some situations, you should use the market value of the property when working out your gain. For example, if the property was a gift, you inherited it, or you owned it before April 1982. Furthermore, you can deduct costs of buying, selling or improving your property from your gains such as estate agents’ and solicitors’ fees as well as costs of improvement works.
Other Relevant Taxes When Selling a House
If you are selling and buying a house, then Stamp Duty Land Tax (STLT) will also be relevant to you. Stamp duty is important in property sales despite not technically being a tax paid when selling a house. This is because, typically, it is likely that many people selling a property will be doing so in order to buy a new house.
SDLT is based on the value of a house, but not all properties will be subject to stamp duty. It normally applies to a property purchased for over a certain price in the UK – the current SDLT threshold for residential properties is £125,000.
If you are a first-time buyer, already own a property and are buying an additional property or are not a UK resident, then different rates of SDLT will be applicable to you.