There are many costs associated with selling property the traditional way.
(Alternative property selling methods can save on these costs.)
But when it comes to selling and taxes, the matter is less clear.
Read on for an overview of how it works.
Do I pay tax on money when selling a house?
Generally speaking, you don’t need to pay tax when selling your main home.
But there are circumstances where you must pay Capital Gains Tax (CGT). It applies to the sale of assets that have increased in value.
The rate you pay is dependent on several factors. These include your income and how much the value of the property has increased.
CGT on residential properties is usually within 18% or 28% of the gain in value.
Whilst you usually do not have to pay CGT when selling your home, there are some exceptions, including:
- The house was purchased to make a gain (e.g., for property development)
- Part of the property is used as a business premise.
- Part of the property was sublet (lodgers do not count)
- The home includes land and/or buildings of 5,000 square metres+
- You have another home that could be classed as your main residence.
Many of these are open to interpretation. So you should speak to an independent financial adviser for advice.
How much tax do I pay when I sell my house in the UK?
Most of the time, you do not need to pay capital gains tax on your primary residence.
(If you have more than one home, you may need to prove which is your primary residence.)
But you must pay a percentage, minus your annual allowance, under some circumstances.
This tax-free allowance is currently £12,300 per person. This means no CGT is payable until the amount has been surpassed on the sale.
After this amount, CGT is charged at 18% for standard rate taxpayers and 28% for higher rate taxpayers.
How is tax calculated on the sale of a property?
Sellers do not need to pay Capital Gains Tax on the entire value of the sale of the property. They only pay it on the amount that is considered gain.
HMRC allows sellers to deduct costs such as:
- Estate agency fees
- Legal fees
- Any applicable stamp duty
- Improvement works. Including the cost of extensions but not general maintenance work like decorating.
Calculation
So, to put it simply:
Gains = Purchase Price – sale price, buying and selling costs, and any costs for improvements to the property
Use the following calculation to work out how much CGT you need to pay:
Gains – CGT Allowance x CGT Tax Rate
Add the amount of gains you need to pay onto your taxable income. This will help you determine the CGT rate you must pay.
Is money from the sale of a house considered income?
Money gained from the sale of a property isn’t considered an income if the property in question is your primary residence.
If applicable, the chargeable CGT rate will depend on your taxable income, but CGT itself is taxed separately from other income.
Also, the tax bracket from your other income will remain the same.
How can I save tax on the sale of a house?
There are a few circumstances where avoiding CGT tax on a property sale is possible. If a resident sells their primary home, CGT does not usually apply to their sale.
If the following criteria are met, homeowners receive Private Residence Relief.
The property must:
- Be their primary residence
- Not be used for business purposes
- Not have part let out (although this does apply to properties with a single lodger).
Working from home
Some of these criteria become more challenging, especially when working from home.
This is because when listing their home address as their business address. So, they might have CGT to pay after the sale.
Size
The property should also be less than 5,000 square metres. This includes the grounds and additional buildings part of the sale.
Rural homes with substantial land may find they are subject to CGT. They may have to sell their land separately.
Main residence
The property should also be purchased as a main residence without the intention to make a gain.
Anyone looking to ‘flip’ a home will find that CGT will likely be applicable upon sale.
How does HMRC know if I have sold a property?
There are various ways HMRC can tell if you have sold a property. These include:
- Land registry records
- Bank transfers
- Advertising records of the property
- Changes in rental income (if it was rented before)
- CGT returns that you need to file.
HMRC may also know because of stamp duty land tax returns from the buyer.
What happens if I don’t pay capital gains?
HMRC requires sellers to declare capital gains tax within 30 days of selling. Otherwise, you could face a penalty and may also be liable for interest owed on the payment.
HMRC launched an online portal to make it easier to pay capital gains tax, and so you can easily notify HMRC of the sale.
Those who are not eligible to pay Capital Gains Tax do not need to worry about non-payment.
Non-UK residents need to notify HMRC when they sell a property or land. This applies even if the gain is below the tax-free allowance or the sale makes a loss.
