April 2020/21: Pay and file capital gains tax Residential Property:
Government has announced in his 2018 budget that anyone whether he/she (landlords and residents in UK) when they sell residential property or a flat on or after 6 April 2020 will have to pay owed capital gains tax (CGT) on UK property within 30 days of the completion of sale or disposal of homes or flats where CGT is payable and at the same time file for return to HMRC. For example, if you complete the sale of your property on 31st July 2020 producing the payable capital gains of £40,000, you will have to pay capital gains tax (CGT) on your capital gains after calculating it and file CGT to HMRC by 30th August 2020.
Do you pay tax when you sell your house UK?
As capital gains tax is only charged on profit that you make on the sale of the property and the type of property. So, you will or not liable to pay capital gains tax in such cases as:
- Not liable to pay tax: If you sell your main home you are not liable to pay capital gains tax or to file the return and you can claim for private residential relief return.
- Liable to pay tax: You have to pay chargeable CGT where full private residence relief is not due and can file for return if you sell other residential properties that are not your main home or resident such as rental domestic properties, second homes, overseas houses and flats, inherited properties, on-sell of home that is partly used as business premises.
How to avoid capital gain tax on property UK?
According to capital gains tax calculator on sale of the property, payable capital gains tax on the sale of the property if it is not your main residents depends upon the followings;
- profit you receive if you sell it high price than the purchase price
- your annual taxable income
- capital gains tax rates,
- CGT allowances,
- Cost of stamp duty paid that you spent before selling the property
- Costs for improvement of assets i.e. extension, kitchen upgrade, etc.
- losses on the sale of other assets
- letting relief
- Private resident relief
So, you can reduce or cut your capital gains tax bill by reducing your taxable income as CGT is charged upon the basis of income tax that you paid. So, by lowering the taxable annual income, you can reduce your CGT rate from 28% to 18% on the sell of your residential property.
Moreover, deducting or subtracting allowable offset losses on sale of other assets, deducting spent costs of stamp duty before selling the property, solicitors’ fees, estate agents’ fees, solicitors’ fees, deducting spent costs for improvement of assets or property, by deducting capital gains tax allowance and deducting partial private resident relief, and letting relief from your net profit or capital gains that you earned by selling property.
We can calculate the capital gains tax on second home property where capital gains are applicable by following the below example.
Capital gains tax on sale of second home:
For example, if Lisa sells a second home in the UK for £250,000 or property on 6 April 2020 after buying 13 years ago at the purchasing price of £140,000.
- Selling price-buying price= Profit or gains
- £250,000 – £140,000 = £110,000
Lisa receives capital gains or net profit: £110,000
Costs of Stamp duty, solicitors’ fees and home improvement:
She spent £10,000 on stamp duty and solicitors’ fees and spent £40,000 on home improvement. So, after deducting the costs of stamp duty, solicitors’ fees and home improvement from total gains, her capital gains would be:
- Total gains minus cost of stamp duty minus solicitors’ fees = remaining total Gains
- £110,000-£10,000-£40,000= £60,000.
CGT Allowance 2020/21 (annual exemption) from capital gains:
As she sells this property in 2020/21, so after subtracting 12,000 (annual exemption for CGT allowance 2020/21 from gains or profit amount of 60,000 that she receives after minus the costs of stamp duty and solicitors fee, her capital gains further come down to:
- Capital gains minus CGT Allowance = remaining total Gains
- £60,000- £12,000= £48,000.
Taxable income tax rates and CGT rates:
Taxable income tax band helps in determining your capital gains tax rate or band to HMRC. HMRC add your other income with your capital gains to see whether you are basic rate taxpayer or higher rate taxpayer in your year of sale. As basic rate taxpayer pays 18% Capital gains tax on gains and higher rate taxpayer pays 28% Capital gains tax on gains. For example, her annual salary is £48,000 that shows that she is a basic rate income taxpayer.
After subtracting her annual salary amount 48,000 that is above from the annual salary amount of 12,500 then her annual income would be:
- Annual salary minus £12,500 (amount with 0% income tax) = annual earning
- £48,000-£12,500= £35,500 annual salary or earning
She pays income tax at 20% on salary or earnings that is above £12,500 and her payable income tax can be calculated by following this below formula:
- Income tax rate 2020 on earning above £12,500 × annual earning or salary= payable income tax
- 20% X £35,500 = £7,100 income tax
So, she pays £7,100 income tax on her annual salary.
We can find her total earning by adding her remaining total taxable gains with her annual salary to get total earning in that year of sale by following the formula
- Capital gains + Annual salary = total earning during this year of sale of property = total earning
- £45,000 + £48,000=£93,000
Her new total income will be £93,000 that falls in higher rate tax band or higher rate taxpayer.
- She will pay 18% CGT on taxable gains above £45,000 and up to £50,000.
Such as after subtracting the maximum and minimum gains ranges, her taxable gains would be:
- Maximum taxable gains minus minimum taxable gains range= taxable gains
- £50,000-£45,000=£ 5,00
- Now applying 18% CGT on taxable gains by following this formula:
- Capital gains tax rate or percentage× taxable capital gains= Capital gains tax
- 18% × £5,000 =£900 Capital gains tax (CGT)
- She will pay 28% CGT on taxable gains that are above £50,000 such as
By subtracting the total earning amount 93,000 that is above from taxable gains of £50,000, her taxable gains would be:
- Total earning – taxable gains above £50,000= taxable gains
Her 28% capital gains tax on gains £40,000 can be calculated by this formula
Capital gains tax rate × taxable capital gains = Capital gains tax
- 28% × 40,000 = £11,200 CGT
By adding the amounts of payable CGT on 18% and 28%, we can get the total amount of CGT that she will pay as
- Taxable gains on 18% + Taxable gains on 28%= Total Gai
- £900 + £11,200 = £12,100 (Total CGT)
So, she will pay £12,100 CGT and £7,100 of income tax.
How do you pay CGT?
Firstly, you need to calculate your capital gains tax and then pay and report it by using real-time CGT service if you want to pay it instantly to HMRC or annually in a self-assessment tax return.
How your personal tax accountant helps you in calculating CGT tax:
You can get assistance from our experienced team of personal tax accountants at Berkshire accountants limited to fill your capital gains tax return. We provide professional services on accountancy, taxation and auditing.