How Does Capital Gains Tax On Property Work?

how does capital gains tax on property work?

Capital gains tax is a tax that is payable on profit made from the sale of an asset. But, this tax works differently when it comes to selling property than it does with assets such as stocks and shares. Capital gains on property have to be declared earlier and they can be taxed at a much higher level as well.


Property Expert Series: Kristen Durose from Red Star Wealth


Introduction To Capital Gains Tax On Property

Amy: So can you talk to me a little bit about capital gains tax? This is something I know very little about so I’m interested to know how it all works?

Kristen: Capital gains tax is a tax that is payable on the disposal of an asset. So, for the purposes of this discussion, it would be payable if you were to sell a property that you owned.

In short, the difference between the amount that you paid for the property and the amount that you sell it for, is your capital gain and that monetary amount is taxable.

Amy: I see.

Kristen: Now, you can reduce your gain by taking into account renovations and money that has been spent on the property but this doesn’t apply to straightforward costs such as decoration costs and similar.

But, for example, if you were to build a third floor onto a two-story house or if you built an extension, then you can use those costs to reduce the amount of gain that you have made.

Annual Capital Gains Tax Allowance

Kristen: And furthermore, the gain will be assessed against your annual capital gains tax allowance, which at the moment is £11,300. So, if your gain is more than that amount you will have to pay tax on it. If it is under that amount, you won’t.

Amy: Well, that shows again how important it is to look at your own individual circumstances and how important it is to make sure that you are looking at cash flow strategies so that you are protected as we go through these turbulent times.

Capital Gains Tax and Buy To Let – When You Have To Declare

Kristen: I was talking to an accountant recently who told me something interesting. Normally, with capital gains tax, what happens is that you have to declare it on your self assessment.

So, that means that you would declare your gains to HMRC after the end of the tax year in which the gain has been made.

Now, with buy to let properties, it is a different process.

When you sell a buy to let, you are expected to declare that return within of three months of it being sold, in which case the chances are that you are going to be getting a bill to pay – that is if you are liable for capital gains tax.

So, for example, if an investor in stocks and shares made some gains, they wouldn’t be declaring that gain until the end of the tax year in which it fell. But, with buy to let property or an investment property more generally and has to be declared much earlier.

The Recent Capital Gains Tax Reduction And How It Applies To Property

Kristen: We’ve actually just had a reduction in capital gains tax. So for most assets, the basic rate of capital gain is charged at 10% and if you are a higher rate taxpayer it would be charged at 20%.

This is a reduction on what it used to be, which was 18% and 28% respectively.

But again, when it comes to selling property it is different. When you are selling a property the old numbers still apply and the recent reduction does not.

Putting It All Together

Amy: This all makes me think so much about the due diligence process for new investors that are coming into the marketplace, who might not be aware of all of these considerations.

It’s not the same marketplace as it was maybe five or ten years ago and you can really get yourself into financial and legal trouble if you are not properly educated about these types of subjects.

Kristen: It is true that it is a very different landscape – very, very different.

I think, one of the biggest things to be aware of is not always taking the, “I can do it myself” approach.

I’ve worked in financial services for 20 years. I’ve seen a lot of clients who I know are very astute in business. These are people who have a plan and know what they want to do Property investors and developers are generally like this. They have a vision and know where they want to get to…

But it is really important not to always take the, “I’ll just do it myself” approach. Because a quick Google search is going to throw up a lot of different facts and figures and not all of them are going to be absolutely current.

The thing is tax and regulation can change with any budget that is announced. In this tax year alone we have seen three major changes.

So these things change all the time. And, if you fall foul of HMRC with your reporting then obviously that’s going to cause you problems.

If you don’t budget properly for capital gains tax or you haven’t anticipated a change in stamp duty – those kinds of things – then it can quickly turn a project from being on-budget into a serious financial problem.

Amy: Yeah, profit to loss. Wow, it’s absolutely fascinating.

Kristen: I think you’re the only person who would say tax is fascinating, but that’s okay.

Amy: It is so interesting to come at investing in property from a different angle. I work in social property which is quite a niche area – so it fascinating for me to sit here and learn something new.

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