The property market is a maze of expenses and tax bills complex enough to send even the most financially competent into hiding. From stamp duty land tax to capital gains and higher rate income tax, you won’t be making that sale without some form of calculator to hand. Indeed, these expenses demand careful strategic thought because all three taxes can be minimised.
Understanding capital gains tax
Capital gains tax (CGT) is taken from your profits and is generally charged only on second and buy-to-let homes, business premises, and inherited property. In the UK, this percentage is higher than that levied against other assets. If you’re a basic-rate taxpayer, you’ll likely pay about 18%, but if you fall into a higher bracket, it may set you back as much as 28%. The rate is calculated according to your year’s tax status, so you might find yourself in a higher bracket than expected. That said, you are given a capital gains tax allowance, with gains of under £11,700 being free of tax. If you’re part of a cohabiting couple, your gain will be calculated according to your joint assets. Since your annual allowance can’t be applied to a forthcoming year, it’s important that you use it as it arises. Some homeowners even sell in a more favourable year to minimise tax.
Gifts to a spouse or charity aren’t usually taxed, and if you’re selling a business asset, you might qualify for some tax relief. In addition, property being used by one of your dependants should qualify for private residence tax relief. CGT applies to the market value of your property if it was a gift or inheritance, or if it was sold at below its value.
Defining a primary property
Primary homes usually don’t incur CGT, so it’s important to determine the meaning of the word “home.” If you own one property and live there for the entire period of ownership, no matter if it’s an apartment or a mansion, it’s considered a home for tax purposes. Things are rarely that simple, though. If you’re married or legally cohabiting, you may only declare one property your home. If your civil partner lives elsewhere, you won’t be able to sell both without CGT. If you live in two different properties and bought the second one within two years of your first, you’ll only be able to use one as your primary residence, even if one of them is in a foreign country. If your spouse lives outside the UK, you won’t be allowed to escape tax on the resale of both.
Deductions
As with most taxes, deductions can save you plenty of money, so remember to subtract your estate agents’ and legal fees, along with any of the work you’ve done to improve the home. The stamp duty you paid on purchase of the property can be used as a deduction, too. If you build extensions or remodel during the time of ownership, you can remove the costs from your taxable gain. Improvements aren’t classified together with maintenance, so all those upkeep costs won’t give you a lighter tax “sentence.” Mortgage interest won’t reduce your CGT either, but you can use it as a deduction if you’re taxed on rental income.
Additional Properties
CGT applies to most portions of your private home, so if you develop part of your property for alternative purposes or use part of your house as an office that you eventually sell, you might attract unwanted taxes. If you rent out part of your house to lodgers or bought a property specifically to renovate and flip it, CGT will apply.
When Your House is a New Home
If you haven’t lived in your house for the entire period of ownership, your gain will need adjustment depending on the date of sale and how long the property has been a primary residence. However, if you couldn’t live there for a maximum of a year due to property development, that period will be free of CGT.
