Capital Gains Tax is the tax bill where a profit made by selling a second house or some property is taxed. Capital Gains are only applicable to second houses and not your main home. For example, if you sell your home, which is where you are residing, it will not be liable to a capital gain tax. But, if you sell a property that you used as a business or something you leased out, you may end up facing a Capital Gains tax bill.
Capital Gain Tax on Property
An 18% tax rate is applied for any profits or gains a primary rate taxpayer made when he or she was selling a property. But for higher rate or additional rate taxpayers, a 28% tax will be applied on properties.
Other than properties, a 10% of introductory rate and a 20% or higher rate will be charged as the capital gain tax for other assets.
There are some downsides to calculating the capital gains tax. For example, when you determine your tax status for the current financial year, any gains you declare along the process of calculating capital gains tax might be pushed into a higher tax bracket.
Fortunately, everyone has a capital gain allowance of €12,300, which can not be taken to the following year. If you don’t use that allowance within the financial year, it will not be brought forward to the next financial year.
But a couple can combine their allowances and make a combined allowance of €24,600.
To the extent that you don’t make an income claim in the current year, the sum does not transfer to the following year.
How Much Capital Gains You Should Pay
Since capital gains taxes are imposed only on second homes and rental properties, it is essential to realize that you could be liable for capital gains if you sell your primary residence or rent it out of your house.
And also, capital gains tax is not implied to what your property was sold for. It is only calculated on the profit you made from selling it.
You will get your profit by deducting the premium from the sales price. Once you acknowledge your profit, you can remove the following from it.
- The expenses associated with the sale and purchase of the home – including stamp duty; and Brokers’ fees;
- The expense of property improvements when you were there.
You can cover the losses by selling an asset and carrying the losses forward. That is to say, you can deduct losses you had from selling an investment with the gains you got from selling another asset if you have more than one asset.
For example, when you sell a home that has made a loss of £50,000, your tax relief will be increased in that amount. When you sell a home, you are entitled to a deduction on any loss you report on your tax return. Alternatively, you can contact HMRC.
Losses can be covered for four years after the date of occurrence.
At a net benefit of £12,200, you will have to pay CGT if you make more than that benefit in 2021-2022.
When To Pay Your Capital Gains Tax Bill
When you sell a home, you must pay a self-assessment tax on the disposal by the due date of your self-assessment tax.
Therefore, the closing date would be the 13th of January of the year after the transaction. Although if you derive a taxable benefit from second-home sales or other disposals, you are liable to pay 30 days after the transaction.
When you’ve finished filing the residential property return, you will pay on the ‘resident tax account.”
It might be worth consulting a lawyer or an accountant about this subject. You can contact Nomads Accounting Specialists regarding this matter as well.
How To Reduce Your Capital Gains Tax
Notice that you will lower the CGT (capital gains tax) payment if you take some measures and steps within the law that are completely legal.
Certain costs are covered as losses, and you can deduct them from the price you sell your second home.
For example, the estate agent’s fees and the lawyer’s fees can be deducted from the profit. In addition to that, the stamp duty paid in the process of selling your tax-liable house can also be removed from the profit you made. Most importantly, the costs you incurred by improving the residence and adding a property extension can also be covered in this way.
But this method will not cover the maintenance costs and mortgage interests incurred on the property.
Capital Gains Tax For Your Main Home
As we mentioned earlier, the Capital Gains tax will only be applied to the profit you make by selling your second house. But there might be situations where you will have to pay capital gains tax on your primary home.
Usually, you have a benefit named “private residence relief’, where you won’t have to pay capital gains tax when you sell your home.
For example, for the tax year of 2021-2022, you won’t have to pay capital gains tax if the house you’re selling is your main house which is your primary residence. You can not be staying out of the alleged house for more than nine months a year. If you do, that house will not be counted as your primary residence.
In addition to that, there are certain other occasions where you might be liable for capital gains taxes.
- Developing your house into a flat
- Selling the land (only if more than 1.2 acres)
- Business usage within the house
- Renting
How HMRC Figures Out Your Main Home
Should you own more than one home, at that point, you are permitted to assign which of these will be your main home for tax purposes.
This does not imply that the property is the place where you fundamentally spend most of your time.
However, it is best if you choose the house which will make the most profit when selling as your main house. Then that profit will become tax-free should you choose to sell that house.
Within two years of purchasing another home, you have to state what your main house is and what is not. It is the best time period to do so.
In addition, married couples can share one main house between them. But, unmarried couples can choose two separate houses as their main house.
CGT and Buy-to-Lets
If you let your main house or a part of the house, that profit gain might be taxable.
But, if you lived in that property recently as your main house, there will be some deductions you can claim that will lower your capital gains tax.
If you have not lived on the property that you are letting, you will not be eligible to claim the lettings relief.
You will be able to claim the one which is the lowest of the following:
- The private residence relief you can get – or £40,000;
- Or the profit gained from the letting proportion of the property.
There are strict rules surrounding this relief and it is best to take advice from a professional rather than cruising through by yourself. Contact us today for a consultation call.