Understanding Capital Gains Tax Rules in the UK for Residential Property Sales in 2024
When selling residential properties in the UK, understanding the Capital Gains Tax (CGT) rules is crucial to ensure compliance and avoid unexpected tax liabilities. This blog provides a comprehensive overview of these rules as of 2024, with a special focus on the reporting requirements.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset that has increased in value. The tax is only on the gain you make, not the total amount of money you receive. In the context of residential properties, CGT applies to second homes, rental properties, and inherited properties, but not to your main home, provided certain conditions are met.
Key Exemptions:
1. Principal Private Residence (PPR) Relief: If the property being sold is your main home, you are generally exempt from CGT due to Principal Private Residence (PPR) relief. To qualify, you must have lived in the property as your main residence for the entire period of ownership, excluding any periods covered by certain exemptions (e.g., last 9 months of ownership).
2. Letting Relief: after the change brought in 2020, letting relief is only available for homeowners who live in the property and partly rent it out.
3. Annual exempt amount (AEA): Individuals have an annual capital gains tax exemption of £3,000 (£6,000 2023/24). If the total of all gains and losses in the tax year fall within this exempt amount no tax is payable. Gains in excess of the annual exemption will be taxable. The exempt amount cannot be carried back or forward.
CGT Rate
The rate of CGT you pay depends on your taxable income and the size of the gain:
• Basic Rate Taxpayers: 18% on gains from residential property.
• Higher and Additional Rate Taxpayers: 24% on gains from residential property. This reduced from 28% on 6th April 2024.
Your total taxable income, including the gain, determines your rate.
Calculating Your Gain
To calculate your gain:
1. Determine the Sale Price: This is the amount you sold the property for.
2. Deduct Costs: You can deduct costs of buying, selling or improving your property from your gain. These include:
• estate agents’ and solicitors’ fees
• costs of improvement works, for example for an extension (normal maintenance costs, such as decorating, do not count)
Reporting and Payment
As of 2024, the rules for reporting and paying CGT on residential property sales have specific requirements. Here's what you need to know:
1. 60-Day Rule: If you sell a residential property and a gain is realized, you must report and pay any CGT owed within 60 days of the completion date. This applies to properties sold on or after April 6, 2020, with an updated deadline effective from 2024.
2. Property Disposal Return: You must use the UK Government’s online service to submit a “Property Disposal Return” within the 60-day window. Failure to do so can result in interest and penalties.
3. Annual Self-Assessment: Additionally, the gain must be reported on your annual self-assessment tax return if you complete one. The amount of CGT due is recalculated considering any tax already paid.
4. Record Keeping: Maintain detailed records of the purchase and sale transactions, including dates, amounts, and costs associated with the property. Good record-keeping helps ensure accurate reporting and can be crucial if HMRC audits your return.
Practical Example
Imagine you bought a rental property for £200,000 in January 2010. You sell it in June 2024 for £350,000. The costs of buying and selling (legal fees, estate agent fees) amount to £10,000. You have not used your annual exempt amount (AEA) of £3,000.
1. Calculate the Gain:
Gain = £350,000 − (£200,000 + £10,000) = £140,000
Determine the Tax Rate: If you are a higher rate taxpayer, the CGT rate will be 24%.
Use AEA
Taxable Gain = £140000 - £3000 = £137,000
2. Calculate CGT:
CGT = 24% × £137,000 = £32,880
3. Report and Pay: You must report this gain and pay the CGT within 60 days of completion. Additionally, you will include this gain in your annual self-assessment return.
Navigating the CGT rules for residential property sales in the UK requires careful attention to detail and timely reporting. Understanding the exemptions, rates, and reporting obligations ensures compliance and can help you avoid penalties. If you're uncertain about any aspect, consulting a tax professional is always a wise decision. With proper planning and knowledge, you can manage your CGT liabilities effectively and ensure a smooth property transaction process.