With the coronavirus pandemic and subsequent lockdown restrictions continuing to have a major impact on the public purse, tax changes could be on the horizon in the UK in 2021. One tax that could be affected is capital gains tax – and this, in turn, could have an effect on you if you’re looking to sell your property.
Here, we’ll recap what capital gains tax is, when you have to pay it and how much you might have to pay – as well as taking a look at the potential changes that could be on the cards this year…
What is capital gains tax?
Capital gains tax is payable when you sell an ‘asset’ for more than what you paid for it.
Assets that are subject to capital gains tax include:
• Personal possessions worth £6,000 or more (excluding cars)
• Property that isn’t a main residence, for instance a rental property or a property that is used for business
• Business assets
Capital gains tax is calculated on the ‘gain’ you make – which is the difference between the price you paid for your asset and the amount you sell it for.
Capital gains tax when selling a house
Property is one of several ‘assets’ that, when sold, could be liable for capital gains tax.
Whether or not you have to pay capital gains tax on a property sale, however, will depend on a number of circumstances.
Do I pay capital gains tax when I sell my house?
If the property you’re selling is your main residence, you qualify for full Private Residence Relief and you won’t have to pay any capital gains tax.
However, if you’re selling a buy-to-let property or a second home that isn’t your primary residence, you could be liable for capital gains tax when you sell it.
Capital gains tax rates when selling a second home or buy-to-let
The rate of capital gains tax you pay when selling a second home or buy-to-let property will depend on your income tax band.
If you pay the basic rate of income tax at 20%, you’ll pay 18% in capital gains tax on property.
If you pay the higher or additional rate of income tax at 40% or 45%, you’ll pay 28% in capital gains tax on property.
The capital gains tax personal allowance
The capital gains tax personal allowance for the 2020/21 tax year is £12,300, meaning you pay no capital gains tax on the first £12,300 of any gains you make.
If your buy-to-let or second home is jointly owned with a spouse, you can take advantage of their personal allowance, too, meaning you’ll pay no capital gains tax on the first £24,600 you make.
Capital gains tax deductions
When selling a property that is subject to capital gains tax, you can deduct a whole host of costs and expenses to lower your bill. These include:
• Your stamp duty from the original purchase
• Solicitor fees
• Estate agent fees
• The cost of any improvements you made, such as extensions, conversions, energy efficiency improvements or a kitchen re-fit
Partial Private Residence Relief and Lettings relief
If you’re a landlord living with your tenants, you may be able to claim £40,000 in Lettings Relief to reduce your capital gains tax bill further.
And if you previously lived in your rental property, or a second home, you may be able to claim relief on any gain made in the final nine months of owning the property.
Calculating capital gains tax on property: An example
Let’s say you pay £200,000 for a buy-to-let property and then sell it 10 years later for £250,000.
• Your ‘gain’ on the property would be £50,000
• You take away your personal allowance of £12,300, which leaves you with £37,700
• Your expenses and costs equal £6,000 which you deduct from £37,700, leaving you with a taxable gain of £31,700
• You earn £30,000 per year in income, which is £20,000 short of the higher rate income tax band
• Therefore, the first £20,000 of your £31,700 gain is taxed at the basic 18% rate and the remaining £11,700 is taxed at the higher 28% rate, leaving you with a total capital gains tax bill of £6,870
Is there a deadline when paying capital gains tax?
Capital gains tax on property must be paid within 30 days of the property’s sale completing.
You must also file a capital gains tax return along with your payment, and if you pay your income tax through self-assessment, you’ll need to declare your capital gains tax liability on your annual return, too.
Do you pay capital gains tax on selling land?
Selling land would normally mean you have to pay capital gains tax on the difference between the purchase price and the sale price.
However, the rate of capital gains tax you pay may not be the same as the rates paid for selling property assets.
Capital gains tax on land sales can be complicated, so always seek the advice of a tax specialist.
Will capital gains tax rules change in 2021?
It’s widely expected that changes to taxation in the UK will be made in the wake of the Covid-19 pandemic and its effect on public spending.
Those changes could either be made during the spring Budget or in the autumn, with capital gains tax likely to be on the Chancellor’s agenda.
The potential changes to capital gains tax could include:
• Alignment of capital gains tax rates with income tax bands, or
• Smaller rises to the current rates of capital gains tax
• A lowering or removal of the current capital gains tax allowance
If you’re looking to move before the stamp duty deadline in March, your options are limited – but auction could be one of them.
Our guide to selling before the deadline explains everything you need to know about the auction process.
And if you are looking to sell, take a look at these property turn-offs you’ll need to avoid if you want to secure a quick sale.