PROPERTY CAPITAL GAINS TAX
The government has announced some good news for UK residents regarding residential property in the Autumn Budget 2021. The chancellor avoided increasing capital gains tax and instead extended reporting deadlines to 60 days from disposal or pay any taxes due when they should deliver a return by then. This change only applies if you’re not a British resident, as non-residents must still report direct/indirect disposals after an acquisition while paying CGT on these holdings at the point of sale without an extension. The new rules also apply equally domestically here at home. From 27 October 2021, the changes to the law will mean that all disposals must comply with new regulations.
Property capital gains tax is a high cost. It can be not very easy for those who have bought or sold the property to pay the additional amount that’s due on their sale. In short, the property capital gains tax is a tax on the sale of second homes and buy-to-let property. Taxes are only one consideration when it comes time for your home purchase or sale – there are also insurance fees that need paying every year.
WHAT IS CAPITAL GAINS TAX?
The Capital Gains Tax is a tax on the profit you make when selling an asset (or disposing of) that has increased in value since purchase. However, it’s not taxed at the total amount but only as gain or “the difference between what was paid for something and how much money can be made off on its resale.” However, capital gains tax is a financial burden, and you may be required to pay 18% or 28%, depending on your income and size of gain when you sell residential property.
WHAT DOES IT MEAN TO ‘DISPOSE OF’ AN ASSET?
If you’re going to be disposing of any assets, the first thing that you should consider is what will happen with them. There are many ways for things like this, and it’s important not only to think about how much money or property something could bring in return but also its sentimental value.
The disposal process can involve gifting an item, transferring ownership by exchanging one asset (like stocks) against another. Giving away some possessions entirely free-of-charge in exchange for either receiving compensation (e.g., insurance pay out); or putting up your house as collateral until financing arrives so someone else takes payments on mortgages while maintaining ownership through closing costs.
If you are looking to get your finances in order, it can be beneficial to speak with an accountant. Naseems Accountants has independent property capital gains tax advisers who are specialised in this domain, so they’re here for all our clients’ needs.
WHAT IS THE CAPITAL GAINS TAX ALLOWANCE?
You must understand how much of your money can be shielded from taxation by investing in property. This is because you only pay Capital Gains Tax (CGT) when an asset increases over time and sells at a higher price than what you originally bought it for – but there are some exceptions! The tax-free allowance is currently £12300 per person from 2020 to 2021, which means any increase surpassing this amount won’t incur charges either way; however, anything exceeding these limits will still generate income through rental fees paid out monthly.
WHAT ARE CAPITAL GAINS TAX RATES ON PROPERTY?
In the UK, you pay higher rates of CGT on the property than other assets. Basic-rate taxpayers will be subject to an 18% gain when selling their homes, while those in higher and additional brackets must contend with a 28%. With all money gains from selling goods or investments, there is no difference; both basic rate tax applies at 10%, but extra payments apply accordingly if it’s anything less than this – such as cars (at 20%). The rules vary depending upon how long one owns them for: short-term tradespeople can opt-out altogether thanks to something called “asset exemption.”
Remember that capital gains will be included when working out your tax status for the year and may push you into a higher bracket. All taxpayers have an annual CGT allowance, so they can earn up to £12300 in 2020-21 without paying any taxes on it – even if their income exceeded this amount by thousands last time around! Unfortunately, you’re not allowed to carry forward these unused allowances from one financial year either: once used, all funds are gone forever unless combined with another partner’s unused individual credits (or lost entirely). However, when couples agree to share their assets, they can combine this allowance and potentially gain £24600.
DO I PAY CAPITAL GAINS TAX ON MY SECOND HOME?
If you are not sure about the tax implications on your home, consult with a property capital gains tax accountants immediately. For example, suppose HMRC decides that it’s not considered as one’s primary residence. In that case, there could be an issue for them in terms of CGT allowances if they own any valuable assets above what was initially thought.
DO I PAY CAPITAL GAINS TAX ON BUY-TO-LET PROPERTY?
Yes, you will have taxes to pay. If the value of your buy-to-let property has gone up and surpassed what’s allowed by CGT allowance when selling it, then there is a good chance that taxation might occur.
DO I HAVE TO PAY CAPITAL GAINS TAX ON INHERITED OR GIFTED PROPERTY?
It’s often possible to avoid paying tax on your property by giving it away to your spouse or partner. If you inherit a piece of land and pay the inheritance tax due, then the gain will only occur when that sale is made – but even taxation can have its benefits.
The type of gift may depend on whether they’re alive at the time of receipt. If so, then special rules apply, which could lead not just to saving yourself money from CGTs charges (or capital gains) but also mean an increased level of income, given how much less taxed properties typically yield than those solely owned through rentals.
WHEN DO I HAVE TO PAY CAPITAL GAINS TAX ON PROPERTY?
If you are looking to sell your home, it is important to know the tax implications. You will usually be taxed on the sale if it’s a second home or buy-to-let property, and many other factors can affect how much money from the selling goes towards taxes like CGT (Capital Gains Tax). For example, legal fees incurred during purchase could end up being deductible when calculating ‘gains’ made in trade; however, stamp duty is paid at the time.
Private residence relief is a tax break that allows you to escape paying capital gains on your primary home. This means, under most circumstances and depending on who you ask at the bank- maybe not even all of them. Private residences will NOT usually be taxed when sold due to their PRR status, making life easier for homeowners, especially with any future exchanges in mind.
WHAT IS PRIVATE RESIDENCE RELIEF, AND HOW DO I KNOW IF I QUALIFY?
PRR is a tax relief that can help you save on your taxes when selling the home where you’ve lived as an owner for many years. To qualify, all other PRR criteria must be met, and this exemption only applies if it’s been your primary residence throughout its entire time under federal taxation laws.
The right to use PRR can be challenging to come by, especially if you are not using part of your primary residence for business purposes only. Additionally, no more than 5,000 square meters must be available because they do not exceed what is allowed. The property has been bought simply as an investment opportunity rather than being lived in full time or rented out.
WHEN IS CAPITAL GAINS TAX DUE?
When it comes to paying your CGT bill, there is a time limit. All properties sold on or after 27 October 2021 will need to make payment within 60 days of the sale completion and submit an official Residential Property Return for this tax to be paid. For purchases between 6 April 2020 and 26 October 2021, however, wait at least 30 days before submitting any request to avoid delays with paperwork processing.
HOW CAN I REDUCE MY CAPITAL GAINS TAX BILL?
Reducing your tax burden is a wise investment. The more money you have, the better off things will be for yourself and those around you. Here are some ways to reduce capital gains tax bills:
- DON’T FORGET YOUR SPOUSE’S ALLOWANCE: It’s important to keep in mind that everyone has some CGT allowance, so if you’re the sole owner of a property and your spouse shares their share with you, then both parties will get twice as much return on investment.
- NOTE THE DIFFERENT CGT BANDS: If you are a higher-rated taxpayer, consider transferring property into your spouse’s name to lower their CGT bill. This is because basic rate taxpayers pay less tax on the same income and assets to benefit even more from this strategy. Be sure to discuss this with an expert, so both of your allowances get used most efficiently.
- TIME YOUR SALE CAREFULLY: If you’ve used up all your CGT allowance for a particular year, consider delaying the sale until the next tax season.
- NOMINATE THE PROPERTY AS YOUR MAIN RESIDENCE: Selling your home? Whether it’s one of many properties you own or just the one, don’t forget to nominate that which will be giving up residence in advance. There are some strict rules on this, so get advice from an adviser about how best to suit yourself and reduce taxes while doing so.
- DEDUCT CERTAIN BUYING AND SELLING COSTS: You may be able to deduct some costs when working out your CGT bill, including legal and estate agents’ fees, as well as stamp duty incurred during the purchase of a property. However, you’re not allowed this deduction for upkeep expenses on assets like paying an extension or taking care of other maintenance needs that arise over time.
POSSIBLE CHANGES TO CAPITAL GAINS TAX IN 2021
According to the Office for Budget Responsibility, CGT is expected to raise approximately £9.1 Billion in 2019/2020. This represents 1.1% of all taxes paid in the UK. It also reflects an economic crisis caused by the global coronavirus pandemic. As such, it isn’t surprising that we need more money from our government during these difficult times so they can fund their programs; accordingly, one way you could do just this would be by increasing capital gains taxes on assets like shares or properties after selling them.
In November 2020, the Office of Tenant Representation issued some recommendations for homeowners and landlords.
- ALIGNING CGT RATES TO INCOME TAX RATES: The government has introduced a new tax on property, which will raise the CGT rates for all taxpayers. Basic-rate payers who are paying 18% now and higher rate earners whose bills amount to 28% will be hit with an additional 20% and 40%.
- REDUCING CGT TAX-FREE ALLOWANCE: The Office of Tax Simplification (OTS) claims that tax credits distort our economy because they give an incentive that does not work but rather stay at home or receive government checks instead by giving out too much money with each paycheque. However, The OTS believes the allowance is harming people’s behaviour. So, they suggest reducing it to between £2,000 and £4,000 annually from £12,300.
WHAT ABOUT LETTINGS RELIEF?
On 6 April 2020, the loss of relief in all but minimal circumstances could cost some taxpayers up to an additional £11,200 on their taxes. This generous benefit was previously available and allowed a significant amount for villagers who had found themselves leasing out properties from which they derived income following retirement or other reasons that made them no longer living there permanently. Losses due to this change will be felt most keenly by those relying heavily upon these types of rental agreements and anyone else owning several assets at risk when acting today. However, this relief was previously exempted up to a maximum of £40,000 of CGT gain.
The rules for claiming private residence and letting relief are different. If you’re renting out your home when it’s time to sell, then ownership will qualify as “private residence” instead of “letting.” The amount that gets taxed depends on the price you sell: any profit over this threshold is eligible for reduced rates.
HOW LETTING RELIEF WORKS
Letting your home out can be a confusing process, but this example will help you understand how to work through capital gains tax when selling the property after being in use for 240 months. If you owned a house for 20 years (or 240 months), you decided it was time to sell up before moving on elsewhere. Note some points down the line:
You have lived in the property full time for 12 years (144 months)
And then used it as a second home for 4 years (48 months).
You rent out your house while living at this location
And finally, having no spouse or civil partner whatsoever.
Let’s have a look at an example below:
|Profit when Marie Ellis sells||£500,000|
|Private Resident Relief (PRR)||144 months (12 Years) + 9 months = 153 153 months out of 240 months = 63.75% 63.75% of £500,000 = £318,750|
|Letting Relief||4 years you use as a second house – 9 months covered by PRR) = 39 months 39 months out of 240 months = 16.25% 16.25% of £500,000 = £81,250|
|Amount of profit – PRR and Letting Relief||£500,000 – £318,750 – £81,250 = £100,000|
|CGT Allowance of 2021 to 20||£12,300|
|Taxable Amount||£100,000 – £12,300 = £87,700|
|Total – If Marie Ellis is a basic-rate taxpayer||18% of £87,700 = £15,786 CGT Due|
|Total – If Marie Ellis is a high-rate taxpayer||28% of £87,700 = £24,556 CGT Due|
In the real world, taxpayers with any income that is not introductory rate can have their gain pushed them into higher tax bands. This means the amount you need for an introductory rate may change if your overall earnings increase and move up in one of these brackets. The example mentioned assumed set assumes no such thing happens – but remember: most people’s situation will be more complicated than this.
WHAT QUALIFIES AS MAIN RESIDENCE FOR CAPITAL GAINS TAX PURPOSES?
The main residence identification question is complicated, but it can be simplified by determining if the home in question meets specific qualifications. This will make it easier for you to shoulder your tax burden and not worry about any additional complications arising from this issue.
Nominate Your Main Residence – Make the Most of It. If you own more than one home, then it’s possible (and wise) to nominate which property will be your primary residence. If that seems like an overwhelming task for someone who doesn’t want their life planned out before them in advance; don’t worry–you only need to make this decision once, if at all during purchase proceedings on any new properties/taxation status changes (e., primary or secondary residences). Then, you can decide what best suits YOU when deciding between buying investment properties with good potential returns versus living rent-free closer to financial stability. If you are married or in a civil partnership, only one of your properties can be nominated.
WHAT CAN BE DEDUCTED FROM TAXABLE GAIN?
Your CGT bill is much more manageable when you can deduct certain costs from it. These include the fees incurred in buying and selling property, such as solicitors’ or estate agents’ charges and stamp duty upon purchasing that new home.
When you buy a property, the cost to improve it can increase your taxable gain. If this is a concern for you, then remember that costs involved with enhancing assets such as paying for an extension or changing out fixtures have been considered when working out how much profit one makes off their investment – these expenses won’t affect taxes; though! Another thing worth noting about improvements made on land: It may not be possible to deduct mortgage interest since government loans provide incentives specifically designed around construction financing needs.
WHICH OTHER TAXES MAY BE DUE ON UK PROPERTY?
When you come to sell your property in the UK, many taxes will apply. One such tax is CGT which stands for capital gains tax, and it’s charged on properties when they change hands between owners or investors who have made transactions within their lifetime.
There are stamp duties to pay when you buy a home; how much depends on whether it’s your principal residence or additional property.
An excellent way for first-time buyers is simply using savings from their mortgage deposit as part of the purchase price – this can lead them into debt quicker and let them adjust before incurring more expenses later down the line.
Residents also need to pay council tax. However, it’s determined by several factors. For example, the amount they owe will depend on the size of their property and location concerning local government boundaries.
Those who are letting out their properties will probably need to pay income tax on the rent, which is mandatory.
After you pass away, the ownership of your home could be subject to inheritance tax. This means that if someone inherits a property from you and lives in it for more than one year, their percentage interest will rise accordingly with inflation.