Selling a property is an important financial decision. Often, you’d do it for the money you’d make from the sale, as well as the freedom of not having to worry about it anymore.
While you might be tempted to sell it off and move on with your life as quickly as possible, it’s important not to forget about the fees and formalities involved—in particular, the Capital Gains Tax (CGT) you’ll need to pay.
Often, this can be quite a hefty chunk of your sales proceeds! But don’t worry; there are ways to keep this amount to a minimum. In this blog, we’ll tell you all you need to know about Capital Gains Tax planning and how to pay taxes when you’re selling your property.
What is Capital Gains Tax?
Capital Gains Tax, or CGT, is the tax you pay on the profit you make when you sell any asset that has increased in value. Note that you’ll need to pay CGT on more types of assets than just property.
If you profit from selling stocks, shares, business assets, or certain valuable personal possessions, CGT applies there, too. The exception is if you’re selling the property that’s your principal residence.
So why do UK residents have to pay CGT? There are several reasons:
- First, taxing capital gains helps to keep the tax system equitable by ensuring that those who make money from selling assets that have appreciated in value pay their share of tax, as would someone who worked a salaried job or ran a business.
- CGT is a vital government revenue source and helps fund key expenditures like maintaining public infrastructure.
- Capital Gains Tax planning is an important policy tool that can incentivise or disincentivise different types of investment, depending on the government’s preferred economic policy.
- CGT also helps the UK stay in alignment with international tax norms and avoid tax evasion.
Who needs to pay CGT?
Capital Gains Tax is paid by anyone who makes a capital gain from the sale or disposal of specified categories of assets. This includes buy-to-let property that has increased in value and inherited property.
However, if you choose to give the property to charity or your spouse, you don’t need to do any Capital Gains Tax planning or pay any taxes.
How much CGT do you need to pay?
This depends on the UK tax band you’re classed under. If you’re a basic rate payer, you’ll pay 18% of the gain within the basic rate band. If you’re a higher rate payer, you must pay 28% on the gain amount that falls within the higher rate or additional rate bands.
In this context, remember to note the Annual Exempt Amount. This applies to everyone in the UK and gives you a tax-free capital gains allowance of £3,000 from 6 April 2024 (this amount dropped from £12,300 in 2022-23, and from £6,000 in 2023-24). If you’re married or in a civil partnership, the allowance applies to each of you individually.
To determine your Capital Gains Tax liability, subtract any applicable reliefs and the total allowable losses from your total gain amount. If the remaining amount is higher than the Annual Exempt Amount, you pay CGT on the excess.
The deadline for paying CGT to HMRC is usually January 31, following the end of the tax year the sale was made.
How to avoid CGT: Capital Gains Tax planning best practices
While you usually can’t avoid paying CGT entirely, you can minimise what you pay in some ways.
- Be sure to use your Annual Exempt Amount effectively.
- Take advantage of any applicable reliefs that can reduce or even eliminate your CGT liability under specific circumstances. For instance, you could be eligible for the Lettings Relief if you had a property that was your main residence and let it out for a while.
- See how you can strategically time the disposal of your assets over multiple years. By spreading them out, you can take advantage of the Annual Exempt Amount every year.
- Look into investment schemes that offer tax incentives to reduce your CGT liability. For instance, if you reinvest in qualifying startups or small businesses, there may be scope for CGT exemptions or deferrals.
- If you’ve incurred losses on an investment, you can potentially use that to offset the taxable gain on another investment.
How to prepare for the sale of your property
When you plan in advance for the CGT on your property sale, you can implement certain Capital Gains Tax planning strategies that will minimise your tax burden. Here’s what we recommend:
- Thoroughly familiarise yourself with all the rules and regulations around property sales. In addition to CGT, for instance, you may need to pay Stamp Duty Land Tax if you are also buying another property, so it’s essential to understand the rates, exemptions, and thresholds for that as well.
- Calculate your Capital Gains Tax liability in advance, incorporating your Annual Exempt Amount and all other reliefs you may be eligible for. Your tax consultant will help you with this.
- Try to time your sale across multiple tax years to take advantage of multiple Annual Exempt Amounts.
- Keep an eye out for any changes in tax legislation that might impact your property sale.
- Look into tax-efficient accounts where you can transfer funds or investments before making the sale. Gains made within Individual Savings Accounts (ISAs) or Self-Invested Personal Pensions (SIPPs) are usually tax-free.
- Consider the broader tax impact of your property sale, including any effect on your overall income tax position, other assets and investments, or Inheritance Tax.
Final words on Capital Gains Tax planning
Hopefully, this blog post gave you a clearer picture of what to expect when you pay CGT on a property sale and how to undertake Capital Gains Tax planning when you have to.
While some tax is unavoidable, there are ways to minimise the amount, so be sure to look into all those options so that you get to keep most of your capital gains.
As always, we recommend working with a qualified financial advisor for Capital Gains Tax planning who can help you navigate CGT laws and recommend the best strategies for a tax-efficient sale.
We’re always happy to help — reach out for a free consultation today.
