When you sell an asset which has increased in value since you purchased it, you could be subjected to Capital Gains Tax (CGT). Whilst the sale of a family home would not usually be subject to any capital gains, the sale of a holiday home, buy-to-let or investment property is likely to lead to a capital gain scenario and potential tax charge.
The gain from a property sale is usually the difference between what you paid and the amount you received when you sold. However, there are some expenses you can deduct which are those associated with the cost of buying, selling or improving the property. These can include the following:
- Estate agents’ fees
- Solicitors’ fees
- Costs of improvement work e.g. extension costs
Unfortunately, any costs associated with normal maintenance such as decorating cannot be deducted. These calculations will provide you with the total gain realised from the property sale. If the property was jointly owned, the overall gain will be proportionally spread across all owners.
Each tax year, everybody has a Capital Gains Exemption; for the current tax year (2020/21) this is set at £12,300. This means that everybody can realise £12,300 in capital gains before any tax charge would arise.
Where an individual’s capital gain exceeds their annual exemption, or the annual exemption has already been used, the rate of tax applied will vary and is based your income and the size of gain. The tax rates applied specifically to capital gains resulting from property sales are either 18% (basic rate taxpayers) or 28% (higher and additional rate taxpayers) of the gain (not the total sale price).
If the sale of a property occurred on or after 6 April 2020, any CGT payable would need to be paid within 30 days of the date of completion. HMRC’s view is that the seller would be able to pay the tax charge due to receiving the proceeds of the property sale. This could cause an issue where the property proceeds are not actually received, for example a property is gifted, or used to inject funds into a business. Therefore, HMRC do not adopt a rigid structure, and GOV.UK provides guidance for people in positions like these.
Some investors may wish to take advantage of deferring the capital gain by investing into an Enterprise Investment Scheme (EIS).
An investment up to the value of the capital gain could be made into a qualifying EIS investment 12 months before or within 36 months of the capital gain being realised. The liability of the capital gain would then not be due until the sale of the shares within the EIS at a future point. Should the shares of an EIS be held at death, any deferred gain is essentially wiped out.
However, since the change to CGT on property sales now being due within 30 days of the sale completion, rather than after the end of the tax year, this potential solution could cause some cashflow issues. The tax relief on the EIS investment would not be available until the end of the tax year in which the investment is made, however, the CGT on the property sale will be payable within 30 days of the sale.
There are other tax reliefs available from EIS investments, which may offer you additional benefits, however, these investments are classed as high risk and therefore careful consideration is required before using EISs.