Capital Gains Tax

Capital Gains Tax can significantly affect the profitability of selling an investment property or second home. Understanding how CGT works helps investors and homeowners plan their finances effectively, ensuring they account for the tax when selling properties that have appreciated in value.

Failure to plan for CGT can reduce the overall returns from a property sale.

Exemptions: Your primary residence (also known as your "main home") is usually exempt from CGT under the Principal Private Residence (PPR) relief. However, second homes or investment properties do not qualify for this exemption.

Annual Allowance: Each year, individuals have a CGT allowance, which means they can make a certain amount of profit before CGT is applied. For 2024, this allowance is £6,000 for individuals.

Rates: CGT rates on residential property are higher than on other assets. For basic-rate taxpayers, CGT is 18%, and for higher-rate taxpayers, it is 28% on the gains from selling a residential property.

Deductions: You can deduct certain costs, such as the costs of buying, selling, and improving the property, from the total gain before CGT is calculated.

Principal Private Residence Relief (PPR): The relief that exempts your primary residence from CGT.

Stamp Duty Land Tax (SDLT): The tax paid when purchasing a property, which is separate from CGT.

Rental Income Tax: Tax paid on rental income from a property, which is different from CGT.

Advantages: Planning for CGT allows investors to take advantage of reliefs and allowances, potentially reducing the tax liability. In some cases, timing the sale of a property in different tax years can help spread out gains to minimise the tax burden.

Disadvantages: CGT can significantly reduce the profit from the sale of a property, particularly for high-rate taxpayers or those selling high-value properties. The inability to apply PPR relief to second homes or investment properties increases the tax burden for investors.

Investors must consider CGT when planning the sale of buy-to-let properties or second homes. It is important to factor in the tax when calculating the overall returns from an investment property. Strategies such as timing sales or using the annual CGT allowance effectively can help reduce the amount of tax payable.

Scenario: An investor selling a buy-to-let property that has appreciated significantly must calculate the capital gain and account for the CGT, possibly spreading out sales to maximise use of the annual CGT allowance.

How can I reduce my Capital Gains Tax liability?

You can reduce CGT by taking advantage of your annual CGT allowance, deducting allowable costs (such as renovation and legal fees), and using reliefs like PPR (if applicable). Timing the sale across different tax years can also help.

Is my primary residence exempt from Capital Gains Tax?

Yes, in most cases, your main home is exempt from CGT under the Principal Private Residence relief, as long as you have lived in it throughout your ownership.

For the 2024 tax year, individuals in the UK can make up to £6,000 in capital gains before paying any tax. Capital Gains Tax rates for residential property sales are 18% for basic-rate taxpayers and 28% for higher-rate taxpayers, making it a significant consideration for property investors and second-home owners.