Demand for rental homes in Wimbledon Village continues to outstrip supply. However, recent changes to legislation has resulted in a drop in income for many landlords leading then to consider selling their buy-to-let properties.
When you sell a flat or house that is not your main residence, you will usually have to pay Capital Gains Tax (CGT). Find out whether you need to pay CGT on the property you’re selling and calculate your tax amount.
What is capital gains tax and when do I pay it on my home?
Capital Gains Tax is payable on the profit earned on a property that is not your primary residence.
Generally, you will not have to pay this tax when you sell your main home, unless it has been used as a business premise or if you have let out all or part of your property (this does not include having a lodger if you are living at the property too).
However, you will have to pay CGT if you are selling a house or flat that you bought as an investment, such as a buy-to-let. Or on a second property, such as a holiday home.
What is the capital gains tax allowance?
All taxpayers have an annual CGT allowance, meaning they can earn a certain amount tax-free. For the 2020 to 2021 tax year the allowance is £12,300. Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,600.
When it comes to property sales, CGT is charged at 18% for standard rate taxpayers and 28% for higher rate taxpayers. This is payable on any profit earned on the property minus your £12,300 CGT allowance.
Tax specialists point out that CGT is only charged at 18% on the amount a seller has available in the basic rate band. Given the size of property value increases in Wimbledon Village, the basic rate band is often used up and most of the gain ends up taxed at 28% even if the taxpayer is a basic rate payer for income tax. Therefore, the rate you will pay depends on the size of the gain and your other taxable income and not just whether you are a basic rate taxpayer.
How do I calculate my capital gains tax bill?
You do not pay CGT on the entire sales value of the property, only on the amount that is counted as gains.
Gains = Purchase Price – (Sale Price + Buying & Selling Costs + Improvement Costs)
To work out how much CGT you will have to pay when selling a rental property in Wimbledon Village, first calculate the gain by deducting the amount you originally bought the property for from the sale price.
HRMC allow vendors to deduct both buying and selling costs from the amount of property profit liable for CGT. This includes estate agent and legal fees plus any stamp duty that was paid when you purchased the rental home.
You can also deduct the cost of improvement works from the amount of property profit liable for CGT. This includes extensions, but not maintenance costs such as decorating, on the condition that those improvements are reflected in the property at the date of disposal.
If, for example, you have had two sets of replacement windows installed in the property during the time it has been in your possession, only the cost of the set of replacement windows remaining in place at the time of sale can be used to reduce your CGT bill.
GCT Payable = (Gains – GCT Allowance) x GCT Tax Rate
To calculate how much GCT you will need to pay, deduct your annual GCT allowance from your gains, you must pay tax Capital Gains on this amount.
Add this amount to your taxable income to determine whether you pay the lower or higher rate of CGT.
Do I pay capital gains tax on my second home?
If HRMC decides that a property is not your main home, you will have to pay GCT.
If you use more than one home you can nominate which one is your main residential property; it makes sense to choose the one you expect will make the biggest gain when you sell it. Married couples and civil partners can only have one main residence between them. Unmarried couples can each nominate a different home.
Do I pay capital gains tax on buy-to-let property?
If your buy-to-let property has risen in value by more than your capital gains allowance, then you will have to pay GCT. Even if it is the only property you own.
Do I have to pay capital gains tax on inherited or gifted property?
If you give property to your child as a gift, you will still have to pay CGT on it as though you have sold it. In this instance, you will use the market value of the property in place of the sale price, then deduct the same costs to work out the amount of your total gains.
In you sell a property you have inherited without having made it your own home, you will pay inheritance tax (CGT) based on the increase in value between the date you acquired the property and the date when you sell, minus any selling costs.
Property given to a spouse, civil partner or charity is exempt from GCT.
When do I have to pay my capital gains tax bill?
For property sold between 6th April 2019 and 5th April 2020, you’ll have until the next self-assessment tax deadline on 31 January 2021 pay the tax owed.
For property sold from 6th April 2020 the rules have changed. The correct tax needs to be calculated, notified and paid to HMRC within 30 days of completion.
How can I reduce my capital gains tax bill?
You can deduct certain costs involved with buying and selling property from your gain when working out your CGT bill. This includes:
- Solicitors and estate agents’ fees when buying and selling the property
- Stamp duty when buying the property
- Costs of improving the property, such as paying for an extension
However, you are not allowed to deduct costs associated with the maintenance of your home or interest paid on your mortgage.
Use your spouse’s allowance
If you are the sole owner of the property, you can share ownership with your spouse which will double your GCT allowance when you come to sell the property.
Make use of the GCT bands
If you are a higher-rated tax payer and your spouse isn’t you could reduce by GCT bill by transferring all or part of the property into their name.
Time your sale
If you have already used all or part of your GCT allowance for the year, consider delaying the sale until the next tax year so you can make use of your full allowance.
Nominate your main residence strategically
If you have more than one property you can nominate which will be tax free, it doesn’t need to be the one where you spend most of your time. If you can, nominate the property you expect will make the largest gain when you come to sell it.
You have two years from when you get a new home to nominate it as your main residential property.
If you have let out either part or all of your property you may be subject to Capital Gains Tax. However, if you used to live in the property you may be able to claim lettings relief which will reduce your capital gains tax bill.
For tax year 2020 to 2021, lettings relief will only be available for people who were in shared occupancy with their tenant/tenants.
If you are planning to buy or sell a property in Wimbledon, then Robert Holmes can help, contact us today.