There has been a lot of talk about capital gains recently, and clients have reached out to me about how this might impact their capital gains. But the question is, will it?
What are residential capital gains?
Capital gains tax (CGT) applies when you sell a property for more than you paid for it. The capital gain is the difference between the original purchase price of the property and the sale price.
However, it’s important to note that your primary residence (the home you live in) typically isn’t subject to CGT.
Tax rates on residential property gains
The rates of tax on capital gains from property are as follows:
- Basic rate (18%) applies to gains up to £37,700
- Higher rate (24%) applies to any gains above £37,700
It’s crucial to remember that the basic rate takes into account all income, including wages or income from self-employment.
These rates have not changed in the most recent budget.
Allowances to reduce your capital gains tax
There are a couple of allowances available to reduce your capital gains tax liability:
- The Capital Gains Allowance: Everyone is entitled to an automatic £3,000 annual allowance. If your gain is below this amount, it won’t be subject to tax.
- Private Residence Relief (PRR): This reduces the portion of your capital gain that relates to the time the property was your primary residence. For instance, if you purchased a home and lived there for 2 years before moving out and renting it, you’ll receive relief for the time you lived in the property. Additionally, the final 9 months of ownership qualify for PRR.
Capital expenditure and its impact on CGT
Expenditure plays an important role in the calculation of CGT. Any improvements or additions you make to the property can increase its base cost, thus reducing the taxable gain when you sell.
Expenditure on the property is categorised into two types:
Revenue expenditure
These are day-to-day costs or repairs that don’t increase the overall value of the property.
Capital expenditure
This includes any work that adds value to the property or increases its overall size. Examples:
- Adding a new bedroom or bathroom
- Building an extension or conservatory
- Installing a high-end kitchen or new fixtures with cutting-edge technology
These improvements can be deducted from the gain when calculating CGT, as they enhance the property’s value.
Declaring and paying your CGT
The deadline for both submitting your capital gains tax calculation and paying the CGT is now 60 days from the date of sale. This is an important element, so it’s essential to plan ahead and ensure you meet the deadline to avoid penalties.