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?

Capital Gains Tax (CGT) is a tax imposed on the profit made when selling an asset, such as property. It applies only to the profit, not the total sale amount.

Example: If you bought a property for £500,000 and sold it for £650,000, CGT would be calculated on the £150,000 profit, not the £650,000 sale price.

This tax ensures that you are taxed on the gain from the sale rather than the overall value of the property.

Capital gain tax rules regarding my own home 

Now the main question arises:

Do 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’ exempts you from CGT on your primary home. However, if you sell a second home or another property, it is subject to capital gains tax.

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Rates for CGT

Once you’ve spent more than your £3,000 yearly tax-free allowance for 2024/25, 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 24%.

For non-property assets, basic rate taxpayers pay 10%, and higher rate taxpayers pay 20%. Note that any gains you make can impact your overall tax position, potentially pushing you into a higher tax bracket..

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: 

Letting Relief can help reduce your Capital Gains Tax (CGT). If you rent out your property while also living in it, you may be able to exempt up to £40,000 from the tax, provided certain conditions are met.

• By utilising your tax-free Allowance: 

Individuals receive a tax-free capital gains allowance known as the Annual Exempt Amount, which is £3,000 for the 2024-2025 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 2024-2025 tax year is £3,000.

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