Everything You Need To Know About Capital Gains Tax – Part 1: On Property

Financial Planning

In this article you’ll learn:

  • What capital gains tax is and when it applies.
  • How to reduce capital gains when buying and selling property.

They say there are two certainties in life: death and taxes. Exercise, healthy eating and regular trips to the doctor might be able to postpone death, but it seems very little can get you off the hook when it comes to taxes.

Sure enough, if you were dreaming of a luxurious retirement funded by the sale of your stocks and shares investment or your buy-to-let properties, think again – the tax man’s got one over on you: capital gains tax is here to spoil the party. But capital gains tax isn’t always as bad as it sounds, and there are ways to lessen its effect.

What is capital gains tax?

Capital gains tax is a sizeable money-spinner for HMRC, bringing in £3.9 billion in 2013-14, making it one of the top-ten biggest tax earners for the UK government (although it’s got a way to go before it tops the £160 billion generated by income tax). While you might not be able to avoid it, arming yourself with the facts can go a long way.

To help you understand it, here’s the top-five things you need to know about capital gains tax:

    1. It may apply whenever you make money on any asset
      It could be stocks and shares or it could be a property – capital gains tax applies when selling an asset that has risen in value. The most likely circumstance is selling a property that has gone up in value or cashing in an investment that has increased in value.
    2. You don’t have to pay capital gains tax on the first £11,100 of any gain you make
      Every year, the government gives you an individual allowance of £11,100 before you have to pay any capital gains tax. So if you sell a property for £200,000 and you bought it for £180,000 (making £20,000 profit), the taxable amount is £8,900 – and how much of that amount that is actually taxed depends on your income tax band. This allowance is per-person, so if you co-own a property with someone else, your total allowance is £22,200.
    3. Capital gains tax rises if you are a higher rate taxpayer – and if you’re selling property
      How much capital gains tax you pay depends on what you earn. If you’re a basic rate tax payer, you’ll pay 10% capital gains tax, while higher rate taxpayers will pay 20% capital gains tax (as of April 2016). But if you’re selling residential property, these rates are higher: 18% and 28%. And watch out: if your gains are large enough, you may begin to pay higher rate taxpayer capital gains rates on the second part of your transaction.
    4. You don’t have to pay capital gains tax on your own home
      If you own more than one property, you can nominate which property will be exempt from capital gains tax. And if you receive a property as a gift, as part of an inheritance, for example, you won’t need to pay any capital gains tax unless you then sell the property for more than it was worth when it was gifted to you.
    5. You can deduct costs from your taxable amount
      You can offset the taxable amount with any costs incurred. For example, if you buy a house for £180,000 and sell it for £200,000 incurring sales fees (estate agents fees and legal costs) of £3,000, that amount can be deducted from the taxable amount.

Capital gains tax is often a nasty surprise for many people, as they either don’t know it exists or don’t know when it applies. But with personal allowances and deductible amounts, it’s not always as bad as it first looks.


Want to know more about capital gains tax? Read the second part of our capital gains tax guide: capital gains tax and its impact on your stocks and shares investments.

If you’d like to speak to a Flying Colours adviser about reducing your tax bill call 0333 241 9900.

We hope you find the education zone interesting and useful, but please remember it shouldn’t be viewed as financial advice.