Are you a landlord or property investor considering selling your home? When selling real estate, it is important to understand the complexities of capital gains tax and other aspects of property accounting to ensure you are minimising how much tax you need to pay and making the most tax-efficient savings.
There are several tax considerations to think of before selling your property. Some have significant tax benefits, while others may take more planning. These tax considerations can include:
- Capital gains tax (CGT)
- Tax-free allowances
- Record keeping
- Income tax
- Stamp duty land tax
At Archimedia Accountants, we are very well-placed to advise you on all areas of growing your property portfolio. Our head of tax, Barbara, has over 30 years of experience as a tax professional, alongside growing an impressive property portfolio of her own.
This blog explains the various tax considerations you should think about before selling your home or investment property. Keep reading to understand the complex topic of real estate taxes, or contact an expert today for advice on how we can help you.
Do you have to pay tax when you sell a property?
Generally, when you sell a property and make any profit, then you may be required to pay capital gains tax. The amount of tax you will need to pay will depend on how much profit you make on the sale.
You can work out the profit (capital gain) by finding the difference between the sales price and the price you initially paid for the property after accounting for expenses such as agency fees, legal fees and stamp duty. If your gain is more than £6,000 (called the annual exemption) in any one tax year (2023-24), you will be taxed on the profit.
However, these regulations vary for anyone looking to sell their primary residence.
What happens if I am selling my main residence?
If you’re selling your home (your main residence), there are no tax implications at all, so you are not required to pay any capital gains tax.
If you have more than one home, then you can choose which property counts as your primary residence. Working with an experienced accountant will help you in this instance, as they can advise you on the most tax-efficient way forward while staying compliant with HMRC regulations.
What are the tax considerations when selling a second property?
If you are looking to sell a second home or investment property, then there are certain tax considerations that will come into play. You will be required to pay capital gains tax on the property or properties you sell (that are not your personal residence) once they exceed the annual exemption. This amount will vary depending on your profit and income tax band.
What is counted as your taxable income when you’ve sold a property?
When you’ve sold a property, your taxable income is calculated as the profit you’ve made minus the annual exemption (£6,000 in the 2023-24 tax year). To determine the profit, you’ll need to find the difference between the sold price (minus legal fees and agent fees) and the purchase price (plus legal fees, agent fees and stamp duty).
Once you’ve got this gain, you can then deduct the annual exemption (an allowance that HMRC allows any individual to make on capital gains for the sale of property and most assets). Once this exemption has been deducted, you’ll be left with a taxable profit.
Your capital gains tax bill will vary depending on the amount of profit you make and your income tax band. For example, higher rate taxpayers are charged 28% on residential property, while basic rate taxpayers are charged 18% capital gains tax.
Can you minimise your tax liability when planning to sell a property?
While you may not be able to avoid your capital gains tax bill, you can reduce the tax implications and make greater savings to secure your financial future. Working with a property accounting expert will help you massively when it comes to staying organised and calculating capital gains tax.
There are various strategies you can implement which will help to reduce your capital gains tax liability.
Offset your losses
One way to reduce your capital gains liability is to use any existing losses from your income and other assets you’ve sold. So, if you have sold additional assets and made a loss on them, then you can offset those losses against any other capital gains you’ve made in the same tax year.
Utilise capital gains tax allowance
Your CGT allowance is an annual tax-free allowance of how much profit you can make on selling your investment property without needing to pay tax. Currently (2023-24 tax year), the annual exemption for property sales in the UK is £6,000.
If you have let out your property at any point during your ownership, you might be eligible to claim Letting Relief which can further reduce any capital gains tax implications.
Private Residence Relief
You may be eligible for Private Residence Relief if the property you plan to sell has always been your main home and you have not intended to profit at any point during your ownership (for instance, letting the property out or using the entire property for business purposes). You will need to ensure that you meet the eligibility criteria and that your garden or grounds are less than 0.5 hectares in size (just over an acre).
You can minimise your tax liability when planning to sell a property by utilising the annual exemption for capital gains tax. For example, if you plan to sell a property you own in your name, you can transfer half of that to your partner or spouse, allowing you to utilise both annual allowances and double the annual exemption in that tax year. With this handy tax planning tip, you could save up to £1,680 (£6,000 * 28% if you are a higher-rate taxpayer).
Deducting relevant expenses
It is also essential to deduct all relevant expenses when looking to sell a property, as this can help you make significant tax savings. Deductible expenses can include any costs contributing to the initial purchase of a property or getting the property into a lettable state, such as legal fees, estate agent fees and capital improvements (though there are rules around this). This is known as capital expenditure and can include adding an extension, purchasing furnishings for the property or any additional renovation expenses.
You cannot claim ‘allowable expenses’ when selling a property, as these are usually deductible from your rental income when renting out the property.
Selling a property can have a significant impact on your personal financial situation. So understanding the important tax considerations before selling your home or investment property is essential for making an informed decision.
Keeping track of all expenses related to your property investments is essential for determining your tax liability and building a successful property portfolio. At Archimedia, we understand firsthand the amount of work that goes into growing an impressive property portfolio and working towards financial security. We aim to help others do the same and make the most tax-efficient savings – for now, and in the future.
Get property tax advice from Archimedia Accountants
Archimedia Accounts are property tax specialists. Our Directors, Barbara and Chris, have a large property portfolio of their own spanning 30 years and including various commercial and residential properties. Combining her personal property investing experience with over 30 years of experience as a tax advisor, Barbara has the specialist skills and knowledge required to head up your tax planning team, whatever your circumstances.
Archimedia is proud to provide a professional service with a unique personal touch. When you join, you will benefit from an individual experience with ongoing property tax planning support and guidance on your personal finances. We’ll provide a tax planning session with you every three months and be on hand to answer any questions in the meantime.
Our approach ensures that your finances are structured in the most tax-efficient way for now and in the future so that you, your property business, and your family save as much tax as legally possible.
Contact us and speak to a property tax expert today.
To learn more about tax considerations before selling property (whether an investment buy-to-let property, a second home or your main residence), take a look at our frequently asked questions below.
How long should you keep a property to avoid capital gains tax UK?
In the UK, you are only required to pay capital gains tax on any properties you sell that are not your main residence. These types of properties can include buy-to-let properties, a second home or any other kind of investment.
For a property to be considered your main residence, you must have lived there for the entire duration of your ownership or a significant amount of time, typically around two years.
Do I have to inform HMRC when I sell my house?
If you sell your house and make a gain from the sale, then you are responsible for reporting this to HMRC within 60 days of selling the house and must pay taxes due. You can do so by filling out a specific tax return for paying capital gains on UK property.
You might also be interested in: What tax deductions can I claim on my investment property?