Capital Gains Tax has been around since the 1960s, but is one of the less ‘groovy’ things from that decade!
It’s something that can cause you a big headache as a landlord, not to mention a big dent in your bank balance. Let’s find out more…
What is Capital Gains Tax?
It’s a payment that you have to make if you’ve made a profit on selling (or “disposing of”) property that’s not your home. So that includes buy-to-let properties, business premises, land or a property that you’ve inherited.
It’s not just selling, either. ‘Disposing of’ a property can also include giving it away as a gift, transferring ownership to someone else, trading it for something or receiving compensation for it – e.g. if you gain money from an insurance claim because the property is destroyed.
What’s the damage?
Capital Gains Tax “CGT" is based on the ‘gain’ you make – that’s the profit you’ve made on the property. So if you bought a house for £250,000 and then sold it for £320,000, your gain would be £70,000.
The tax free allowance for capital gains this tax year is £11,700, or £5,850 for a trust. So with the example above, you would take £11,700 off your £70,000 and pay CGT on the remaining £58,300.
The rate you pay depends on your personal circumstances and income tax band, but it can range from 18 to 28 per cent. So that’s up to £16,324 using our example amount.
HMRC has built a dedicated calculator for working out Capital Gains Tax liabilities on property. Use the calculator here.
Some good news
If the property is a business asset - e.g. you buy and sell properties as part of your business, you might get tax relief or pay income or corporation tax instead.
There are also some ‘allowable losses’ that you can deduct from the total gain, including any investment you’ve made in improving the property - as long as you haven’t already claimed for these against your income. That might include new windows or an extension. You can also deduct professional fees from the sale of the property like legal costs and mortgage fees.
How to notify HMRC and pay
You must report your gain to HMRC in your self-assessment tax return. This needs to include the figures around the gain, any deductions and any reliefs you’re entitled to. HMRC will then contact you with the amount due and the deadline.
It’s certainly not a simple and straightforward tax but, for landlords, it’s a very important one to be aware of. Your accountant is best to advise and assist you as everybody’s circumstances are different, but there’s lots of information on the Government website that may help you too.