When an individual is selling a residential investment property in the UK, understanding the intricacies of capital gains tax (CGT) and the 60-day reporting rules is crucial. This blog aims to guide property owners through the process, highlighting what can be offset in terms of costs and the steps involved in reporting the gain. Whether you're a seasoned investor or a first-time seller, this comprehensive guide will provide you with the knowledge needed to navigate the sale smoothly.
Selling an investment property can generate a nice influx of cash if done well, but it comes with its fair share of tax implications. One of the most important aspects to consider is Capital Gains Tax (CGT). In addition to understanding CGT, property owners must also be aware of the 60-day reporting rules introduced in April 2020. This blog will cover the essentials of CGT, what costs can be offset, and the process of reporting the gain.
Overview of Capital Gains Tax (CGT)
Capital Gains Tax is a tax on the profit made from selling an asset, such as an investment property or shares. The gain is the difference between the purchase price and the sale price, minus any allowable expenses. Here's a breakdown of the key points:
- CGT Rates: For individuals, the current CGT rate on residential property is 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. The rate is applied to the gain after deducting any allowable expenses and the annual CGT allowance (currently £3,000 per person for the 2024/25 tax year).
- Allowable Expenses: These can be subtracted from the gain to reduce the CGT liability. Allowable expenses include the costs of buying and selling the property, improvements made to the property, and legal fees.
What Can Be Offset in Terms of Cost?
When calculating your capital gain, several costs can be deducted:
- Purchase Costs: These include the price paid for the property, as well as incidental costs such as stamp duty, legal fees, and survey costs.
- Improvement Costs: Expenditures on capital improvements (not regular maintenance) can be deducted. For example, adding an extension or installing a new kitchen qualifies, whereas repairing a leaky roof does not.
- Selling Costs: Costs associated with selling the property, including estate agent fees, advertising costs, and legal fees, can also be deducted.
The 60-Day Reporting Rules
Introduced in April 2020, the 60-day reporting rule requires individuals to report and pay any CGT due on the sale of a residential property within 60 days of the completion date. Failure to comply can result in penalties and interest charges. Here’s what you need to know:
- Reporting: Within 60 days of the property sale completion, you must report the sale to HMRC using the 'Capital Gains Tax on UK property account'. This is a separate account from your annual self-assessment tax return.
- Payment: Alongside reporting the gain, you need to make a payment of the estimated CGT liability within the same 60-day period.
The Process of Reporting the Gain
Reporting the gain involves several steps:
- Calculate the Gain: Determine the capital gain by subtracting the purchase price and allowable expenses from the sale price.
- Register for a CGT on UK Property Account: If you don’t already have one, set up an account with HMRC specifically for reporting CGT on property sales.
- Report the Sale: Log into your CGT account and report the details of the sale. You will need information such as the date of purchase, the purchase price, the sale date, and the sale price.
- Pay the CGT: After reporting, you will receive a calculation of the CGT owed. Make the payment within the 60-day deadline to avoid penalties.
Get advice
It's more than likely that you'd benefit from getting advice on the sale from an accountant or tax adviser before starting the process with an estate agent. At Donaldson Ross & Co. we can review your ownership set-up and ensure that your sale is as tax-efficient as possible taking your individual circumstances into account.
Conclusion
Selling an investment property in the UK involves several tax considerations, particularly around Capital Gains Tax and the 60-day reporting rules. By understanding what costs can be offset and the process of reporting the gain, you can ensure compliance and potentially reduce your tax liability. Remember, thorough record-keeping and timely reporting are key to a smooth and successful property sale.
If you're considering selling an investment property, start planning early to manage your tax obligations effectively. For more personalised advice and assistance with calculating or filing your Capital Gains Tax, get in touch with Donaldson Ross & Co. today.