What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax paid on profit or anything gained from the selling or disposal of an asset.

The selling or disposal of an asset is when you cease ownership of the asset through any of the following methods:

  • Selling
  • Giving it away
  • Transfer of ownership
  • Exchange
  • Compensation

Tax is paid on what is gained, not the amount of money received for the asset.

Capital Gains Tax for landlords

Properties that are used by the owner as their own private home do not usually have Capital Gains Tax payable on them, however, in most cases where the property is being let then Capital Gains Tax is payable.

Landlords become liable for Capital Gains Tax if profit is made when the property is being sold. If the property being let is sold within 3 years of purchase, you will be exempt from paying Capital Gains Tax. If you resided at the property for some time within those 3 years, this will reduce your Capital Gains Tax liability, meaning you will only pay tax for the amount of time the property was not your principle residence.

Capital gain is not generated by deducting the purchase price from the sale price. There are allowances that can reduce your Capital Gains Tax liability, including:

  • All landlords have an annual amount they can gain which is exempt from Capital Gains Tax, called the ‘annual exemption allowance’. If property is owned by more than one person then this allowance is multiplied by the number of owners. The current annual allowance for Capital Gains Tax is £8200.
  • After the property has been owned for two years, the owner/s is able to receive an allowance called ‘tapered relief’. The longer you’ve owned the property, the more beneficial this allowance becomes. The allowance increases for each year of ownership after two years giving a greater discount on any taxable gain, up to a maximum of ten years.
  • Improvements made to the property which have not brought relief as an income expense can become deductible expenses. Examples of this can be installing double glazed windows and central heating.
  • Professional fees associated with the purchase or sale of the property are deductible allowances. These can be charges made by solicitors, financial advisors, mortgage specialists, surveyors and much more.

For further information on Capital Gains Tax, if you are a landlord in need of tax advice or if you need to file a tax return, feel free to contact Tax Talk (UK) Ltd on 0845 075 8494 or visit our website www.taxtalkuk.co.uk.