Are there tax implications for selling your home? The answer isn’t straightforward and depends on what you use the property for. Confused? There’s no need to be because we break down everything you need to know about tax and selling your house in this guide. Read on and find out if you pay tax when you sell your house.
Do I pay tax when I sell my house?
The short answer is no (for most people) which is good news.
You don’t need to pay tax when it’s your primary residence (more on that shortly). The sale of your main home typically benefits from a tax exemption known as Private Residence Relief (PRR). When selling a primary residence, homeowners are generally not required to pay Capital Gains Tax (CGT) (more on that soon, too) on any profit from the property’s appreciation.
This favourable tax treatment encourages homeownership and reduces the financial burden of selling your main home. Certain conditions must be met for homeowners to qualify for PRR, however. For starters, the property needs to have been the homeowner’s primary residence throughout the entire period of ownership and not used for any income-generating purposes.
Additionally, the property’s grounds should not exceed half a hectare (1.23 acres) unless there is a justifiable reason for a larger area. If it exceeds this area, you may lose eligibility for full relief.
What if the property is a second home or a buy-to-let?
The situation is somewhat different when it comes to the sale of second homes or buy-to-let properties. Capital Gains Tax (CGT) suddenly becomes relevant, as any profit made from the sale of these properties is considered a taxable net gain. Of course there are CGT allowances and deductions which can apply to reduce the tax burden.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax levied on the profit gained from the sale or disposal of an asset, such as shares, property or other investments. It’s calculated based on the difference between the asset’s purchase price and its selling price, minus any associated costs of buying, selling or improving the asset.
CGT aims to tax the appreciation of an individual’s or company’s wealth resulting from the disposal of assets.
In many jurisdictions, including the UK, CGT rates vary depending on the type of asset being sold and the taxpayer’s income bracket. Not all asset disposals are subject to CGT, as certain exemptions and reliefs may apply. Selling a second home or buy-to-let property, however, is liable for CGT.
How much might I have to pay for Capital Gains Tax?
Capital Gains Tax (CGT) incurs a rate of either 10% or 18% for individuals taxed at the basic rate. Anyone taxed at a higher or additional rate is charged either 20% or 28%. If your usual tax rate is the basic rate but the addition of the gain to your taxable income elevates you to the higher-rate threshold, then you will be subject to CGT at both rates.
The CGT rates apply to the gain amount after deducting the annual exempt amount. For instance, if you sell an asset for £10,000 and have already used your £6,000 annual exempt amount, you will only pay CGT on £4,000 of the gain.
CGT rates are reviewed annually and can increase or decrease; the 2023/24 tax year rates are as mentioned above. Remember that these rates are general, and various reliefs and exemptions may reduce the CGT you owe. You may be eligible for relief if you sell your primary residence or invest in certain asset types.
Can I reduce the amount of CGT owed?
Several methods may help decrease your Capital Gains Tax (CGT) on a second home or rental property. These include:
Offset losses against gains
Losses from selling an asset can be offset against gains from other assets within the same tax year, potentially reducing your overall CGT bill. This includes agent fees, any marketing to sell the home and even the stamp duty paid when you bought the property.
Strategise your sales.
Plan asset sales to reduce your CGT bill, such as selling during a tax year with unused annual exempt amounts or offsetting gains against losses. If you need to sell a property fast, then reach out to Property Rescue. We can exchange contracts in 7 days.
Private Residence Relief and Lettings Relief
If a property has been the owner’s primary residence at some point during the period of ownership, a partial Private Residence Relief may apply exempting the owner from tax of the portion of time in which he resided in the property.
Another example is Lettings Relief, which only applies if both owner occupation and letting overlap during ownership.
Given the complex nature of tax legislation and the potential reliefs available, it’s worth consulting with a tax professional to navigate the sale of a second home or buy-to-let property in a tax-efficient manner.
Do I have to inform the HMRC when I sell my house?
When you sell your house, you may or may not need to inform HMRC, depending on whether you are liable for Capital Gains Tax (CGT) on the sale. There’s no need to inform HMRC or pay CGT if the house you are selling is your principal residence and you meet the Private Residence Relief (PRR) criteria. PRR generally covers the entire period of ownership for your main home, with some exceptions.
However, you may need to report the sale and pay CGT if:
- The house was not your primary residence for the entire time you owned it.
- You rented out part or all of the property.
- You used the property for business purposes.
- The property is larger than 5,000 square metres (around 1.2 acres) in total.
- You sold another property during the same tax year and have already used your annual CGT allowance.
If you are liable for CGT, you generally need to report the gain and pay the tax due within 30 days of completing the sale using the UK Government’s online “Report and pay Capital Gains Tax on UK property” service.
What happens if I sell my house without a chain?
Selling without a chain doesn’t directly impact your tax obligations. Tax implications mainly depend on factors like whether the property is your main residence or if you make a profit exceeding your annual CGT allowance.
What if I’m buying and selling a home at the same time?
In terms of taxes, buying and selling simultaneously won’t change your tax obligations. Selling may incur Capital Gains Tax if it’s not your primary residence or if the profit exceeds the annual allowance. When buying, you may be liable for Stamp Duty Land Tax, depending on the property price and your circumstances.
A recap about tax when selling a house
When selling a house, it’s essential to know about tax exemptions, like Private Residence Relief (PRR) for primary residences and Capital Gains Tax (CGT) for second homes or buy-to-let properties. Your annual CGT allowance, which may change yearly, can offset taxable gains. Tax reliefs and exemptions may be available in certain situations, like partial PRR or Lettings Relief. Consulting a tax professional is recommended to navigate tax implications effectively and understand CGT rates and allowances for your specific situation.
Summary: Life, death and taxes
If you sell a second home or buy-to-let property, then you may be required to pay Capital Gains Tax on the profit made. But anyone selling their primary residence needn’t worry about paying tax. It’s a straightforward process that doesn’t require any reporting to the HMRC. Thinking of selling your home? We can buy it from you. Get a free, no-obligation quote in just 30 seconds.