Capital Gains Tax
Capital Gains on Property
A Guide for Property Owners
What is Capital
Gains Tax on Property?
Capital Gains Tax (CGT) is a crucial consideration for property owners in the UK, especially when selling a buy-to-let residential property or a commercial property. Whether you're a seasoned investor, just starting out or tax planning, understanding the implications of Capital Gains on Property is essential to ensure compliance with tax laws and avoid any unexpected financial burdens.
Capital Gains Tax is a tax on the profit you make when you sell or dispose of an asset that has increased in value. In the context of property, this typically applies to buy-to-let residential properties and commercial properties. The tax is only charged on the gain you make, not on the total amount of money you receive.
Capital Gains on Buy-to-Let Residential Properties
Buy-to-let properties are subject to Capital Gains Tax when they are sold. The rules for calculating the gain and the tax due can be complex, but the basic principle is straightforward: you pay tax on the difference between the purchase price of the property and the price you sell it for, minus allowable costs such as the cost of improvements and the purchase/sale costs like legal fees and estate agent fees.
For individuals, the current CGT rates for residential properties (as of the 2023/24 tax year) are:
18% on gains for basic-rate taxpayers.
28% on gains for higher and additional-rate taxpayers.
It's important to note that these rates apply specifically to residential properties, which are often subject to higher CGT rates compared to other assets.
Capital Gains
on Commercial Properties
Commercial properties, like offices, shops, or warehouses, are also subject to CGT when sold. However, the tax rates for commercial properties are generally lower than for residential properties:
10% on gains for basic-rate taxpayers.
20% on gains for higher and additional-rate taxpayers.
As with residential properties, you can deduct certain costs from the sale proceeds to reduce the gain on which tax is payable. These include the original purchase price, the cost of improvements, and the costs of buying and selling the property.
Deadlines for Reporting and Paying Capital Gains Tax
When you sell a property, you must report and pay any Capital Gains Tax owed within specific deadlines to avoid penalties.
For UK Residents:
If you sell a residential property in the UK, you are required to report the sale and pay the tax within 60 days of the completion of the sale. This is a relatively recent change, as the deadline was previously 30 days before being extended in October 2021.
For Non-Residents:
Non-UK residents must also report the disposal of UK property within 60 days, whether or not there is any tax to pay.
How to Report:
The disposal must be reported to HMRC using the online 'Capital Gains Tax on UK property' service. You will need to have or create a Government Gateway account to use this service.
Penalties for Late Returns
What happens if you don’t report capital gains tax?
Failing to report your Capital Gains Tax within the 60-day deadline can result in significant penalties:
Initial Penalty: If you miss the deadline by even one day, you will face an automatic penalty of £100.
After 6 months: If the return is still not submitted, an additional penalty of either £300 or 5% of the tax due (whichever is greater) will be charged.
After 12 months: A further penalty of £300 or 5% of the tax due (whichever is greater) will be applied.
In addition to these penalties, HMRC may also charge interest on the unpaid tax from the date the payment was due until it is paid.
Final Thoughts
Understanding and complying with the rules around Capital Gains on Property is essential for property investors in the UK. Whether you are dealing with buy-to-let residential properties or commercial properties, knowing the tax rates, deadlines, and potential penalties will help you manage your investments effectively.
If you're planning to sell a property, contact us and we will help you navigate the complexities of Capital Gains Tax and ensure that you meet all your obligations on time. This will not only save you money but also give you peace of mind as you manage your property portfolio.