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Selling any kind of property is subject to Capital Gains Tax (CGT). Despite what some accountants may tell you, the basic calculation for CGT is quite simple but it can be complex if your circumstances are different. This article explains the process of calculating CGT on property sales and the various factors that can affect the final tax amount.
Calculating Capital Gains Tax
- Disposal Proceeds and Profit: When you sell a property, you receive ‘disposal proceeds.’ Subtract the property’s purchase cost from these proceeds to find your profit.
- Deducting Expenses and Reliefs: You can deduct certain expenses like stamp duty and agency/solicitor fees from your profit. Depending on the property and circumstances of the sale, you may be able to offset some reliefs as well.
- Annual Capital Gains Tax Exemption: After deducting your reliefs, you can also deduct your annual capital gains tax exemption. The remaining amount gets taxed at either 18% or 28%.
For more information on CGT calculation, visit HMRC’s guidance on Capital Gains Tax.
Capital Gains Tax Rate The CGT rate depends on factors such as your income and the size of your capital gains. If you have no other income, or it’s covered by your income tax personal allowance, the first £37,700 of your capital gains is taxed at 18%. If your income uses up your basic-rate tax band, you’ll pay 28% tax on your capital gains.
Effective Capital Gains Tax Rates In some cases, your effective CGT rate may be lower than the maximum rate of 28% due to deductions and the annual CGT exemption.
Disposal Proceeds Usually, the disposal proceeds are the cash received when the property is sold. However, if you sell your property to a ‘connected person’ for less than it’s worth or if the transaction isn’t at ‘arm’s length,’ the disposal proceeds will be the true market value of the property.
Connected Persons Connected persons include spouses, children, parents, siblings, and business partners. Transferring assets to your spouse or civil partner doesn’t incur CGT.
Acquisition Cost To calculate your acquisition cost, consider the amount you paid for the property or the market value of the property if it was transferred to you at less than market value. If the property was purchased before March 31, 1982, the acquisition cost is the value of the property on that date.
Deductible Expenses After subtracting the acquisition cost from the disposal proceeds, you can claim costs related to the acquisition and disposal of the property, like stamp duty, agency fees, and legal fees. Enhancement expenditures, such as a new kitchen or bathroom, can also be deducted if they reflect the property’s state and nature at the time of sale.
Principal Private Residence Relief In many cases, the disposal of your main residence will be exempt from CGT due to Principal Private Residence relief, which provides a full or partial CGT exemption for properties occupied as main residences.
For more information on Principal Private Residence Relief, refer to HMRC’s guidance on selling your home.
Conclusion Understanding the calculation of Capital Gains Tax on property sales can help you better prepare for potential tax liabilities. Make sure to consider all relevant deductions, exemptions, and reliefs when calculating your final tax amount. Please contact our specialist tax advisors to review specific facts and circumstances to ensure proper tax treatment and compliance with UK tax laws.