You may have to pay Capital Gains Tax (CGT) on the profits you make if you sell property that’s not your main residence, for instance buy-to-let, second home, business properties, land and inherited property.
You will pay 18% CGT in you are a basic rate taxpayer or 28% if you are a higher rate taxpayer.
It is important to note here that all of your capital gains will be added to your income for the tax yearto determine if you will pay CGT at the basic or higher rate. It is important to be aware of this as it may push you into the next tax bracket. In the current year (2023-24) you are able to claim capital gains of up to £6,000 free of charge which unfortunately has been reduced from £12,300 from the previous year (2022-23).
If you sell a property you jointly own with another person then you are each entitled to the annual exemption potentially allowing you to have £12,000 limit before paying CGT. This is not 100% guaranteed but it is something that is worth knowing in case you’d like to find out if you could be eligible.
Are there ways to reduce the profit made?
Yes!
There are a few ways you can deduct from your total profit, for example costs when selling a property and any capital improvements to the property.
Costs involved when selling property:
To reduce the profit you would make you can deduct your selling fees such as your solicitor and estate agent fee. For example:
You sell a second home in 2023-24 for £250,000. You bought the property for £150,000 10 years ago. Your capital gain is £100,000. You spent £6,000 on solicitors and estate agents which reduces your capital gains to £94,000. You have no other gains or losses to include from other transactions so your CGT allowance of £6,000 can also be deducted reducing your taxable gain to £88,000.
Improvement to the property:
Over the length of time you have had the property you may have made some improvements such as building an extension. Using the same example above, say it cost you £25,000 to build an extension. You would also be able to deduct the £25,000 from your total gains reducing it down to £63,000.
To be clear it does need to be an improvement to the property, items such as replacement windows would not be eligible as it will be covered under the upkeep of the property.
As you can see just looking at two reliefs you can reduce the total gains from £100,000 to £63,000 which ultimately reduces the amount of CGT you pay.
Are there other reliefs available?
There are other more complicated reliefs available like Lettings Relief which might be suitable for you and your circumstances.
You can claim Lettings Relief were you have lived in your home, and let part of the property to a tenant. This relief is only available to those who have shared occupancy with their tenant or tenants.
It is a complicated relief and will solely depend on your circumstance so we would advise you to get tailored advice.
Capital Losses
If you have made a capital loss on the disposal of an asset (property or non-property), in the year or an earlier year, you can offset these losses against any capital gains you have made. You should review any previous disposals you have made, in order to identify any potential capital losses.
Roll-over Relief
If you are disposing of a business asset – which can include a Furnished Holiday Lets (FHL) – and acquire another business asset, you can elect to ‘rollover’ over the capital gain in to the new asset. This means the CGT will only be payable when you eventually dispose of the new asset.
The new business asset does not even have to be the same type of asset, but does need to be purchased in a window starting 12 months before and ending 36 months after the disposal.
Final piece of advice
Before you put your property on the market for sale, explore your options. Property is a large and expensive asset that you don’t want to lose out on. Speak to a tax expert who can share with you your options based on your situation including why you are selling and what the money will be used for.