What Are the Taxes on Selling a House?

What Are the Taxes on Selling a House

Whatever your reasons for selling a property, we’re going to bet that you want to maximise your profit, right? 

Many homeowners forget to factor in the taxes they are liable to pay when calculating their expected financial gain from selling a house. These can be significant, so make sure that you know what to expect and budget accordingly. 

UK taxes on selling a house vary depending on several factors, such as the sale price and whether or not the house is your principal residence or a second home. Our beginner’s guide will give you all the essential information you need to make an accurate estimate of the profit you can make by selling.

Do You Have to Pay Taxes When Selling Your House? 

Not everyone will have to pay taxes when selling a house. It depends on how much the property sells for, if it has increased in value since you bought it and several other factors, such as whether the property is a business premises, buy-to-let or a second home.

There are two types of tax that may be payable when a house is sold in England. The buyer may have to pay Stamp Duty Land Tax and Capital Gains Tax may be payable by the seller.

What Is Capital Gains Tax in Simple Terms?

Capital Gains Tax (CGT) is a tax on the profit you make from selling a property (or other assets) that has increased in value. 

It is called Capital Gains Tax because it is the gain you’ve made that is taxed, not the entire proceeds from the sale. For example, if you bought a house for £200,000 and sold it five years later for £250,000, your gain is £50,000 and this is the amount that CGT is payable on. 

How Do I Know If I Have to Pay Capital Gains Tax?

Not everyone who sells a house in England is liable to pay CGT. You are exempt from paying the tax if any of the following apply to you:

  • The gain you have made does not exceed your tax-free allowance for the year (£12,570 for 2021/2022)
  • You gift the property to your spouse or partner
  • You gift the property to a charity
  • You sell your main or only home (although there are exceptions to this, for example, if you have sublet part of it).

You probably will have to pay Capital Gains Tax if the property you are selling is:

  • A second home
  • A buy-to-let property
  • A business

However, the amount due may also be reduced if the property you sell is a business asset, for example, a property developer who buys and sells property for a living. 

The rules around eligibility for Capital Gains Tax may seem overwhelming and complex. It’s always best to check with a qualified legal professional to ensure that you understand what you’re liable to pay for.

What is the Capital Gains Tax for 2021?

The CGT rate varies depending on your income and the size of the gain. 

If you are a higher-rate taxpayer (you earn between £50,271 and £150,000), you’ll pay 28% on your gains from residential property. To calculate the exact amount of tax due, subtract your tax-free allowance from the amount you have gained by selling the property. You will be charged 28% CGT on the resulting amount.

For example, you gain £50,000 from selling a property. Deducting your 12,570 tax-free allowance leaves £37,430 that is taxable at the 28% rate. The amount of tax due is £10,480.40.

If you pay the basic rate of tax, the maths is a little harder! If the amount you gain from selling a residential property minus your tax-free allowance pushes you into the higher tax bracket, you will pay 28% on everything gained/earned in this band and 20% on the earnings that fall within the basic tax rate.

When Do I Pay Capital Gains Tax?

As of 6 April 2020, if you sell a property that incurs CGT, you must submit a property return to HMRC and pay what you owe within 30 days. 

How Do I Avoid Paying Taxes When I Sell My House?

If you are liable to pay Capital Gains Tax, you must pay it. 

However, you can potentially reduce your CGT bill by taking advantage of all the tax-free allowances you are eligible for. If you want to sell a property that is in your name only, adding your spouse or partner’s name as a joint owner would allow you to apply both of your tax-free allowances. There would be no tax due on over £25,000, rather than just £12,570.

And if you are selling a rental property that you previously lived in, there may be a reduced CGT rate. 

It is worth seeking some free legal advice to check that you aren’t paying more than you need to.

 

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