Capital Gains Tax (CGT) on residential property is a crucial consideration for property owners and investors. At Venthams, we understand the importance of staying informed about tax obligations, especially with the changing regulations for the 2024/25 tax year. This blog provides an overview of CGT on residential property, including how it is calculated, the applicable rates and strategies to manage your tax liability effectively.
Understanding capital gains tax
CGT is applied to the profit made when you sell or dispose of an asset that has increased in value. For residential property, this can mean significant tax liabilities, especially given the current housing market trends. CGT is only payable on the gain you make, not the total amount you receive from the sale.
Many property owners are unaware of the specific CGT regulations for residential properties, leading to unexpected tax bills. We aim to clarify these rules and provide actionable advice.
Calculating CGT on residential property
To calculate CGT, you need to know your gain. The gain is the difference between what you paid for the property (including associated costs) and the amount you sold it for. Allowable costs include:
- purchase price
- stamp duty land tax
- legal fees
- improvement costs (but not maintenance costs).
For example, if you bought a property for £300,000, spent £20,000 on improvements, and sold it for £500,000, your gain would be:
£500,000 − (£300,000 + £20,000) = £180,000
CGT rates for 2024/25
The CGT rates for residential property differ from other assets. For the 2024/25 tax year:
- basic rate taxpayers: 18%
- higher and additional rate taxpayers: 28%
These rates apply after deducting any available allowances and reliefs. The annual CGT exemption for 2024/25 is £3,000. This means you can deduct £3,000 from your total gain, and only pay CGT on the remaining amount.
Reliefs and exemptions
Several reliefs can reduce your CGT liability.
- Private residence relief (PRR): If the property was your main home at any point during ownership, you might qualify for PRR, which can significantly reduce or eliminate your CGT liability.
- Letting relief: This relief can be available if you let out your main residence. It’s worth noting the rules around letting relief have changed, and it’s now more restrictive.
- Business asset disposal relief: Previously known as entrepreneurs’ relief, this might apply if the property was used for business purposes, though it’s less common for residential properties.
Reporting and paying CGT
Since 27 October 2021, UK residents must report and pay CGT on residential property sales within 60 days of the completion date. Failure to meet this deadline can result in penalties and interest charges. Here’s how to ensure you comply.
- Calculate your gain: Determine your capital gain by subtracting your allowable costs from the sale price.
- Deduct reliefs: Apply any applicable reliefs to reduce your taxable gain.
- Report the gain: Use the HMRC online service to report your gain. You’ll need a Government Gateway account to access this service.
- Pay the tax: Ensure you pay the calculated CGT within the 60-day window.
Practical tips for managing CGT
Plan your sale strategically: If possible, time your property sale to coincide with other tax planning strategies. For example, if your income varies, selling in a year when you are a basic rate taxpayer can reduce your CGT rate.
Utilise the annual exemption: Ensure you make full use of the £3,000 annual exemption. If you’re married or in a civil partnership, consider transferring ownership between partners to maximise the exemption.
Keep detailed records: Maintain comprehensive records of your property transactions, including purchase and sale prices, associated costs and any periods where the property was your main residence. This documentation will be crucial for calculating your gain accurately and supporting any claims for relief.
Example scenario
Consider you sell a residential property for £600,000, which you bought for £350,000, with additional costs of £30,000 for improvements and legal fees. Your gain is: £600,000 − (£350,000 + £30,000) = £220,000
After deducting the annual exemption of £3,000, the taxable gain is: £220,000 − £3,000 = £217,000
If you are a higher rate taxpayer, your CGT liability would be: £217,000 × 28% = £60,760
The bottom line
Understanding and managing CGT on residential property is vital for property owners and investors. By staying informed about the latest regulations and planning strategically, you can minimise your tax liability and avoid unexpected bills. At Venthams, we are here to provide expert advice and support tailored to your specific circumstances. If you need assistance with CGT or any other tax-related matters, please get in touch with us.
Remember, proactive tax planning can make a significant difference in your financial outcomes. Let us help you navigate the complexities of CGT to ensure compliance and optimise your tax position. Contact us today.