A comprehensive guide for understanding Capital Gains Tax

PROPERTY CAPITAL GAINS TAX

If you are trying to sell your property, you might have heard of capital gains tax, or you generally want to know about capital gains tax, so this blog is for you.

As you know, the UK is a country bound by its strong values and laws that are mandatory to follow. So, it is considered good to know about basic terminologies like CGT. Before digging deep into the capital gains tax, let’s briefly look at the capital gains tax.

WHAT IS CAPITAL GAINS TAX?

CGT is a tax imposed on an individual when they sell a particular asset, such as property. Mainly you have to pay CGT when you make profit after selling your property.

There is one more thing to know about CGT: it applies only to the profit you made after selling your property, not to the total amount of your property.

Let us understand with a simple example. For example, if you purchased a property worth £500k and now you are selling it for £650k, then CGT will be imposed on that £150k profit you made after selling this property.

Capital gain tax rules regarding my own home 

Now the main question arises:

Should I have to pay capital gains tax on my home?

You don’t have to pay capital gains tax if you are selling your main home; “private residence relief” saves you from CGT on your primary home. If you sell your second home or other property, it is subject to capital gains tax.

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Rates for CGT

Once you’ve spent more than your £12,300 yearly tax-free allowance, you’ll be required to pay capital gains tax based on your tax bracket. A basic rate taxpayer must pay 18% capital gains tax on the sale of real estate, whereas higher rate and additional rate taxpayers must pay 28%.

Basic rate taxpayers pay 10%, and higher rate taxpayers pay 20% of the proceeds from selling non-property assets. You should also be aware that any gains you make will be considered when determining your overall tax position, which could push your tax status into a higher category.

Capital Gains Tax on inherited property

You don’t have to pay CGT after you inherit property after the passing of someone, but the value of this home will be added to your property. It means you have to pay inheritance tax on your home. If you sell your inherited property without making it your home, you have to pay it.

It will increase the value between the time you inherited it and when you sold it.

Calculating Capital Gains Tax

If you sell inherited property in the United Kingdom, you may be subject to capital gains tax depending on the property’s value and the conditions under which it was sold. The amount of tax that must be paid is equal to the purchase price reduced by the “basis cost” of the property, which is often the market value of the inherited property. Allowances not subject to tax and estate planning can help lower tax obligations.

Ways to reduce capital gains tax:

There are specific ways in which you can reduce your capital gains tax to some extent.

• Transferring ownership: 

You can share ownership of your property with your spouse or civil partner. It can reduce your overall tax liability.

• You can utilise letting relief: 

It is a good practice to reduce your CGT, rent out your residence while living in it, and exempt up to $40,000 from the tax.

• By utilising your tax-free Allowance: 

Individuals receive a tax-free capital gains allowance known as the Annual Exempt Amount, which is £12,300 for the 2022-2023 tax year. You can use it to lessen your CGT.

• Private Residence Relief:

If the property was your primary residence for some or all of the period you owned it, you might qualify for Private Residence Relief, which exempts all or a portion of the gain from tax.

• By investing in a new property: 

Capital gains tax may be postponed under the “rollover relief” rules if the proceeds from the sale of a property are invested in the purchase of another property.

• Rules regarding selling your inherited property:

When selling an inherited property in the United Kingdom, you may be subject to capital gains tax, depending on the inheritance circumstances and the property’s valuation. Here are some considerations to keep in mind:

If the property was inherited and the decedent’s estate was subject to inheritance tax, the property may have already been assessed for tax reasons.

• Tax basis: 

The capital gains tax liability is based on the difference between the sale price and the “base cost,” typically the property’s market value at the time of inheritance.

• Tax-free allowances: 

Each tax year, individuals have a tax-free capital gain allowed, known as the Annual Exempt Amount, which for the 2022-2023 tax year is £12,300.

Estate planning: 

It may be feasible to minimise or defer capital gains tax burden by structuring the inheritance using estate planning procedures, such as passing the property to the surviving spouse or civil partner.

Frequently asked questions