Don’t get caught out by the Capital Gains Tax trap

The rules around Capital Gains Tax (CGT) and property sales are continually changing and many homeowners may not be aware that they could owe tax on the disposal of a property.

Typically, when a main home is sold there is no CGT due thanks to Private Residence Relief (PRR). In some circumstances, however, you may have to pay tax, at a rate of either 18 per cent or 28 per cent, on the gains you have made.

This tax must be reported and paid within 60 days! We are finding that many second homeowners and property investors aren’t aware of this and are facing penalties as a result.

It is important that you understand the tax implications of selling a property.

Do you owe Capital Gains Tax on your property sale?

With the regulations surrounding Capital Gains Tax (CGT) and property sales constantly shifting, many homeowners may not realise that they owe tax on the disposal of a property.

When a main home is sold, there is usually no CGT due thanks to PRR, but tax may be owed in some cases on the gains you have made on a second home.

Higher and additional rate taxpayers pay CGT on property disposals at a rate of 28 per cent, while basic rate taxpayers may pay tax on some of their chargeable gains at a rate of 18 per cent if the sale or transfer is not fully covered by PRR.

Tax is only charged on the gains made on a property, not the total value of the sale, and most taxpayers benefit from an annual CGT tax-free allowance of £12,300 (2022/23).

Any CGT due on UK residential property disposals made by UK residents must be reported and paid within 60 days of completion. Where there is joint ownership, all of the relevant parties will need to file a return.

Who does this affect?

You will be impacted if you own a property other than your main residence, including:

• Let properties
• Second or holiday homes

You can also be impacted by the sale of your main residence in circumstances where:

• You have let it out in the past
• You have used it for business
• It is especially large

It’s important to note that you only have to pay CGT on gains that exceed your annual allowance (the current tax-free allowance is £12,300 per person).

If you are the only owner of a property, sharing ownership with your spouse will double your allowance on a future sale.

How can CGT be reported?

When reporting a sale of a UK residential property to HM Revenue & Customs (HMRC), you may be required to create a Capital Gains Tax on UK property account, which we can help with.

This will permit you to:

• Report the disposal of UK residential property or land
• Pay any tax owed for that disposal
• View previous and current returns.

Although there are some exemptions from completing a return, the deadline gives limited time to retrieve supporting documentation, prepare CGT calculations or obtain valuations if needed.

Non-UK residents must also report all sales or disposals of UK property (residential and non-residential) within 60 days. This is still the case if there is no tax to pay or they have made a loss.

Changes for divorcing couples

From 6 April 2023, the rules relating to CGT and the transfer of assets between divorcing couples or separating civil partners will change under new proposals.

Under these changes, those separating will have three years after the year they cease to live together in which to make no gain or no loss transfers.

This CGT treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement, including their property.

The option to claim PRR will be extended to former spouses or partners who retain an interest in the form matrimonial home.

These changes should help to minimise the tax impact of divorce and ensure that tax relief is available to both parties during a sale within the time period given.

Take action now

It is easy to overlook these requirements, but you must report the relevant information to HMRC within this time frame and any tax paid to avoid penalties.

The rules surrounding CGT on property sales are complex, so it is worth seeking advice if you are unsure of how this affects you.

Considering selling a property? Find out how we can help you to manage and minimise your tax bill by speaking to us.