Will Selling My House Increase My Taxes?
Putting your home on the market is a big decision to make, mainly because of the financial commitments that it requires – from mortgages to taxation. There are a lot of questions you should ask while selling a home, and one of the main ones is – will the sale increase you taxes? If you are about to sell your home, either yourself or through an agency, we put together some information to help you understand what you can expect and the ways to reduce your tax bill. We also look at changes the government may be making in the future.
The tax to consider when you are selling a property is Capital Gains Tax (CGT). Capital Gains Tax is payable when you sell a home (or any asset) that has increased in value since you bought it. When calculating the tax rate, such factors as your income and size of the gain are taken into account. Capital Gains Tax on residential property varies from 18% to 28% of the gain – not the total sale price.
If you put your house on the market and it is your main residence, and your intention is to buy and move into a new home which will become your primary residence, then you generally do not need to pay Capital Gains Tax. However, if a home sold is not your primary residence then you will need to pay this tax on any profits you make. This includes second homes, both bought and inherited, as well as buy-to-let properties. If the house is used for business then it may also be applicable for this tax. There are some other factors which may entail paying Capital Gains Tax, such as if the property includes 5000 square metres or more/additional buildings, or if you bought it just to make a gain, for example if you are a property developer.
Some of these points may be open to interpretation and dispute, so if you are in any doubt it is worth seeking professional advice.
Before calculating the Capital Gains Tax, your personal annual allowance is taken into account. The tax-free allowance is currently £12,300 per person in 2021-2022. You only pay Capital Gains Tax on gains that exceed your annual allowance. This means your property can increase by this amount before any CGT is to be payable on the sale. Any amount above this will incur Capital Gains Tax property rates.
Second home – Are you fortunate to have two or more homes? Then you will have to pay Capital Gains Tax on any property except the one which is your main residence. HMRC will define which home or homes are not your main residence and calculate CGT on any gain in their value above your allowance.
Buy-to-let – Are you selling your property which have been let? Then you might be subject to paying Capital Gains Tax. This is only if, by the time you sell it, your buy-to-let property has risen in value by more than your capital gains tax allowance.
Do I have to pay capital gains tax on inherited or gifted property? Good news – there are no Capital Gains Tax to pay if you give a property to your spouse or civil partner, or to a charity.
There are no further tax to pay if you inherit a property and any inheritance tax due has been paid by the estate, until you sell the property. The gain will be measured from the date at which you acquired the property. You may not have to pay Capital Gains Tax if you sell a property that was occupied by a dependent relative.
The amount of your Capital Gains Tax depends on your income and the size of the gain, not the property price. Working out the exact amount may require some calculations. The calculations are simple if you are a higher-rate tax payer. You need to just subtract your Capital Gains Tax allowance from your gain – and your tax bill will be 28% of the remainder.
Calculating your CGT if you are a basic-rate taxpayer is a bit more complicated. You first need to work out your gain-minus-allowance. If this lifts your income into the higher-rate band, everything above the band will be taxed at 28%, while everything below it will be taxed at 20%. Your adviser can help you calculate it accurately.
These figures are based on selling a residential property. Other assets may be calculated differently.
There are several ways you can minimise or even eliminate a Capital Gains Tax bill.
Remember your spouse’s allowance
Capital Gains Tax allowance is for everyone – so if you are the sole owner of a house, you can double your allowance by sharing ownership with your spouse.
Note the different CGT bands
If you are a higher-rated taxpayer and your spouse is not, you could reduce your Capital Gains Tax bill by transferring all or part of the property into their name – basic rate taxpayers pay lower CGT. Ask your adviser about the most efficient way to do this, to make best use of both your allowances.
Postpone your sale
If you have used up some or all of your CGT allowance for a particular year, consider delaying the sale of your property to the next tax year.
Nominate the property you are selling as your main residence
If you own several properties and wish to sell one, you may be able to reduce or eliminate the CGT bill by nominating it as your main residence in advance. The rules on doing this are fairly strict, so talk to your adviser about how to do this properly.
Deduct certain buying and selling costs
When working out your Capital Gain Tax bill, it is possible to deduct some costs including legal and estate agents’ fees, and the stamp duty incurred when buying the property. Costs involved with improving assets, such as paying for an extension, can also be taken into account when working out your taxable gain. Unfortunately, deducting costs involved with the upkeep of the property are not allowed. Neither interest on a loan to buy your property. So, watch it.
There might be some changes to Capital Gains Tax in 2022.
Increase in the tax collection from Capital Gains is one of the areas the Government has been looking at. Capital Gains Tax, its rates and allowances have not been changes in 2021, there is still a possibility for it in 2022 or in future years. One of the Government’s recommendations are to aligning Capital Gains Tax rates to income tax rates. That means basic-rate taxpayers who pay 18% CGT on property, and higher-rate taxpayers who pay 28% on property, will be charged 20% and 40% respectively.
Another recommendation is reducing Capital Gains Tax free allowance. The OTS think most people are avoiding any tax liability by using up their CGT allowance every year. It, therefore, suggests the annual exempt amount of £12,300, should be reduced to between £2,000 and £4,000. The Government confirmed in the March 2021 Budget that the personal allowance for CGT will be frozen until 2026.