Capital Gains Tax on Real Estate: What You Need to Know

Real estate investment can be a lucrative venture, but it’s essential to understand the tax implications involved. In the UK, capital gains tax (CGT) is applicable on the profit you make when selling a property. This article aims to provide you with a comprehensive overview of the capital gains tax on real estate in the UK, helping you navigate the tax landscape and make informed decisions.

What is Capital Gains Tax?

Capital gains tax is a tax imposed on the profit you make when selling an asset, including real estate. In the UK, capital gains tax is applicable to residential properties, buy-to-let properties, second homes, and holiday homes. It is important to note that CGT is not applicable to your primary residence, as there are specific exemptions in place.

How is Capital Gains Tax Calculated?

Capital Gains tax rate varies depending on your income and the type of asset sold. For basic rate taxpayers, the capital gains tax rate on residential properties is 18%, while the rate for other chargeable assets is 10%. If you fall into the higher or additional rate tax brackets, the capital gains tax rates are higher. The rate for residential properties is 28%, while the rate for other chargeable assets is 20%. 

Capital Gains Tax Exemptions and Allowances

Principal Private Residence Relief

If you sell your primary residence, you may be eligible for Principal Private Residence Relief (PPR). PPR exempts you from paying capital gains tax on the profit made from the sale. However, if the property has been used partially for business purposes or is larger than the standard exemption size, the relief may be pro-rated.

Letting Relief

Letting Relief is another exemption that can be applied if you have let out a property that was once your main residence. This relief allows you to reduce your capital gains tax liability by up to £40,000, depending on the amount of time the property was used as your main residence and the rental income received.

Annual Exempt Amount

Everyone in the UK has an annual exempt amount, which is the threshold of capital gains that can be realized tax-free each tax year. For the tax year 2022-23, the annual exempt amount is £12,300. Any gains above this threshold will be subject to capital gains tax. It has been revised to £6,000 for 2023-24.

Types of Property Subject to Capital Gains Tax

Residential Property

When selling a residential property that is not your primary residence, capital gains tax is applicable. This includes properties that you own and have not used for business purposes.

Buy-to-Let Properties

If you have invested in a buy-to-let property, any profit you make from selling it will be subject to capital gains tax when you sell the real estate property. It’s important to keep detailed records of the purchase price, costs incurred during ownership, and the selling price to accurately calculate your capital gains..

Second Homes and Holiday Homes

If you own a second home or a holiday home, any profit from their sale will also be subject to capital gains tax. This applies regardless of whether you let out the property or keep it solely for personal use.

Capital Gains Tax and Inheritance

Inherited Property

Inherited property is generally exempt from capital gains tax. However, if you choose to sell the inherited property, you may be liable for capital gains tax on the increase in value from the date of inheritance to the date of sale.

Capital Gains Tax on Gifts

If you gift a property to someone else, it is treated as a disposal for capital gains tax purposes. The market value of the property at the time of the gift is used to calculate the capital gains tax liability, even if no money changes hands. To know more about inheritance tax, read our article over here.

Impact of Capital Gains Tax on Property Investors

Property Development and Trading

Property developers and traders are subject to different rules regarding capital gains tax. Profits from property development and trading are treated as trading income rather than capital gains. As a result, they are subject to income tax rather than capital gains tax.

Incorporating a Property Business

Some property investors choose to incorporate their property business by setting up a limited company. This can have tax advantages, as the profits are subject to corporation tax rather than income tax or capital gains tax. However, there are specific rules and considerations to be aware of when incorporating a property business, and it is advisable to seek professional advice.

Reinvesting Capital Gains

Another strategy for mitigating capital gains tax is to reinvest the proceeds from a property sale into another property. By utilizing certain reliefs and allowances, such as rollover relief or investing in a qualifying investment, you may be able to defer or reduce your capital gains tax liability.

FAQs

Is capital gains tax applicable to my primary residence?

What is the annual exempt amount for capital gains tax?

  • The annual exempt amount is £12,300 for 2022-23 and is reduced to £6,000 in 2023-24 for individuals.

Can I offset losses against capital gains for tax purposes?

  • Yes, you can offset losses from the sale of other assets against your capital gains to reduce your tax liability.

What are the capital gains tax rates for higher rate taxpayers?

  • Higher rate taxpayers are subject to a 28% tax rate on residential properties and a 20% rate on other chargeable assets.

Are inherited properties subject to capital gains tax?

  • Inherited properties are generally exempt from capital gains tax, but if you sell the inherited property, you may be liable for tax on the increase in value since the date of inheritance.

Got any more queries? Book a completely free consultation with one of our tax specialist and get your queries answered.

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