Capital Gains Tax on Sale of Property

Although you do not usually have to pay tax on the gains made when you sell your home, you may be liable for capital gains tax on sale of property, if that property is not your main residence. Many people nowadays own second properties, for a variety of reasons; it might be a business premises, a holiday home, an investment property, or simply a piece of land which they use for agricultural purposes. In terms of how the tax for the gains made on these properties is calculated, it’s worth noting that there are special rules which apply to certain types of properties, depending on what they are used for. For instance, different calculations are applicable to capital gains tax on land, and there are several different kinds of relief available for properties used for commercial purposes.

However, for the majority of second properties, you can calculate the capital gains tax you will owe by subtracting the total costs of the selling process - including the agents’ commission, stamp duty, fees and the price you bought the house for, from the sales proceeds. The tax office also allows you to deduct the costs associated with any major refurbishments made to the property – for instance, if you added an extension. Capital gains tax on sale of property will then be applied to the resulting figure, minus the AEA (the Annual Exempt Amount).

If you dispose of the property in another way - for example, if you sell it for a very low price without trying to make a profit, or give the property away, you could still be held liable for capital gains tax based on that property’s actual current market value, as opposed to what you actually ‘earned’ from the disposal. As a basic taxpayer, capital gains tax on sale of property currently stands at 18%, whilst those in the 40% income tax bracket are liable for a higher rate of 28%.

Capital Gains Tax on Sale of Property

Another somewhat complicated situation can arise when a person inherits a house from their parents. If they leave the property to the child in their wills, the beneficiary then receives the property at the market value it had at the time of the testators’ death. Whilst there will be no capital gains tax owed at this point, if the beneficiary decides to sell that property at a later date, they may then owe tax and the amount would be based on the property’s increase in value, from the date of the testators’ passing, to the date on which the house is sold.

Those who own investment or holiday properties overseas will also usually have to pay capital gains tax, if they are living and working in the UK for most of the year. The exception to this rule is those who are not domiciled in the UK, despite being resident. In this case, they may be permitted to claim for remittance basis. For those who have left the UK and are living in a property abroad, they may still have to pay capital gains tax if they sell that property – only after five years of being resident outside of the UK will that liability cease. Because of this, expats that are considering selling an overseas property should always carefully consider the potential liabilities before they begin the process, as this will allow them to put the money aside, should they discover that they will owe capital gains tax.

A lot of people purchase property abroad specifically to rent it out to holidaymakers and create a second income, rather than use it as a second home, in which case they can normally avail of business relief when they eventually decide to sell. In order for a property to be eligible for this, it has to have been available for renting for at least 210 days of the year, and has to have been actually commercially rented for a minimum of 105 days out of the tax year. In addition to these requirements, the property must not have been rented to the same person for more than a month. Provided these conditions are met, they can avail of entrepreneurs’ relief, gifts hold-over relief, or business asset roll-over relief when the property is eventually sold.

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