Capital gains tax is a tax on profits, and most people will never need to pay it when they sell a home. This is because if your home is your main residence, you are eligible for private residence relief. In short, any profits you make on your home are yours to keep.
Where it gets a bit more complicated is when you inherit a property and wish to sell it.
But I already paid tax!
If you’ve already paid a tax on the home, that was likely inheritance tax. This can be up to 40%, but it depends on the various allowances available to the estate. In fact, the average estate pays just 6% in inheritance tax.
Capital gains tax is payable on any amount that you make above the value of the property when you inherited it, less allowable deductions (profit, essentially).
Therefore, if you have a house that was listed as being valued at £200,000 when you inherited it and you sell it for £200,000 a couple of months later, you have made a loss due to estate agent fees and solicitor fees and won’t be liable for capital gains.
However, if you have a house that was valued at £200,000 and sold it for £300,000 a couple of years later, you would have to pay capital gains tax. However, don’t fret; there are deductions that you can use to help reduce the amount of capital gains tax you pay.
Deductions for capital gains tax
Allowable deductions include any fees that you had to pay to inherit the property. These could include solicitor’s fees, fees for surveying the property and even valuation fees. That’s why it’s important to keep receipts of any expense you had relating to the property.
Then, you can deduct anything that significantly improved the property and its value. If, for example, you redid the kitchen with a luxury installation, plastered the walls and installed central heating, you can deduct the cost of that. Again, you will need receipts. Maintenance costs do not count, and nor does replacing the kitchen with one of a similar standard.
Next, you can deduct any costs associated with selling the property, such as estate agent fees, the cost of valuing it, surveyors and so on. You cannot claim business expenses, such as mileage, however.
Finally, everyone has a personal allowance of £11,300 (for the 2017-2018 tax year) that is free from capital gains. However, if you sell multiple houses in the same financial year or dispose of a business at the same time, you may have already used this allowance.
How much do I pay?
Using the property mentioned above, which theoretically sold for £300,000:
- Value when you acquired it: £200,000
- Cost of acquiring it (solicitor’s fees etc.): £2,000
- Major improvements (kitchen, bathroom): £10,000
- Cost of selling: £5,000
Total profit is therefore £83,000.
- Capital gains tax allowance: £11,300
The total taxable amount for the purposes of capital gains tax is then £71,700.
How much you pay depends on your income. If you earn £25,000 a year, your tax would look like this:
- The first £20,000 of the taxable gain is multiplied by 18%
- Then the £51,700 taxable gain is multiplied by 28%
This results in a tax bill of £18,076.
If you earn £35,000 a year, your tax would look like this:
- The first £10,000 of the taxable gain is multiplied by 18%
- Then the £61,700 taxable gain is multiplied by 28%
This leaves a tax bill of £19,076.
This works because you deduct any income above £11,500 (your personal allowance for 2017-2018) from £33,500 to see how much of the capital gains falls into the first bracket (18% for property). Any amount above that is taxed at 28% (again, for property).
So for our person earning £25,000, the calculation looks like this:
- 18% band amount: £33,500 – (£25,000 – £11,500) = £20,000
- Everything above that is paid at 28%
And for our person earning £35,000, the calculation looks like this:
- 18% band amount: £33,500 – (£35,000 – £11,500) = £10,000
- Everything above that is paid at 28%
This leads to the curious case where someone earning nothing in a year in taxable income (i.e., for the purposes of income tax) would pay the same rates of capital gains as someone earning £11,500 per year in taxable income. In this case, both people would pay £16,726 on £71,700 of taxable gain.
Anyone earning more than £45,000 for the 2017-2018 tax year will pay capital gains of 28% on the total, as they will not qualify for the first rate.
What about 2018 to 2019?
The personal allowance goes up to £11,850 in April 2018, so you would have to substitute that figure in. In addition, the basic tax rate will soon be rising from £33,500 to £34,500. Therefore, our person earning £35,000 would then pay the 18% rate on £11,350 instead of £10,000.
- 18% band amount: £34,500 – (£35,000 – £11,850) = £11,350
- 28% band amount: £71,700 – £11,350 = £60,350
- Tax paid at 18% = £2,043
- Tax paid at 28% = £16,898
This would lead to a tax bill of £18,941.
Help!
Fortunately, HMRC has a handy capital gains calculator that will calculate everything for you. However, it cannot handle tax rates beyond the current date, so if you want to see how much you could save by pushing forward the sales date to another tax year, you would have to work it out using the method above.
Of course, we know that you want to save money where you can, and that’s why Yopa is always happy to help you reduce your estate agent fees. Our rates are low because we use the latest technology and ensure that our agents offer realistic prices to ensure that your house is fairly valued. Book a valuation now to see how much your house is worth.
