Navigating Capital Gains Tax: A Crucial Insight for Property Transactions
In the field of property transactions, the spectre of Capital Gains Tax (CGT) looms large, often catching individuals unaware and leading to potential financial consequences.
At Whittaker and Co, we recently encountered a case that underscores the importance of understanding and complying with CGT regulations to avoid unnecessary additional payments. This revelation prompts us to shed light on the intricacies of CGT, particularly for those engaged in property flipping and transactions.
Understanding Capital Gains Tax:
Capital Gains Tax is levied when an individual sells a property that is not their primary residence, requiring them to pay tax on the profit generated from the sale. It is imperative to note that individuals have a 60-day window from the sale to report and settle their CGT obligations through the UK Property Disposal Service. Failure to adhere to this timeline may result in penalties and the accrual of interest on unpaid taxes.
Selling through the trading accounts of a business:
For properties sold through the trading accounts of a business, CGT may not be applicable. However, individuals must be prepared to pay Income Tax on the profits.
The property is the individuals main residence:
If the property serves as the individual’s primary residence throughout the entire ownership period, typically, no tax will be due. However, certain factors may introduce tax implications, which we have outlined below:
- If another property is the individuals main home.
- If the garden and grounds exceed 0.5 hectares.
- If only a part of the property is the main home.
- If the property was lived in for only part of the ownership period.
- If the property was never inhabited, even if was intended to be the main home.
- If the property was purchased for a family member’s residence instead of the individual.
Deductible and Non-deductible Expenses:
When calculating the gain on property disposal, allowable deductions encompass estate agent and solicitor fees, as well as costs related to property improvements such as loft conversions. However, normal maintenance costs, mortgage interest, and capital mortgage repayments are non-deductible.
Personal time spent working on the property cannot be claimed, except for actual expenditures.
If you are a trustee or nominee, you will not have to pay CGT, but it is essential to inform the beneficial owner as they may owe CGT.
Inherited and Gifted Properties:
Inherited properties incur Inheritance Tax on the value at the date of death, with CGT applicable only if the property is subsequently sold for a higher value. Gifted properties may trigger CGT if not transferred to a family member.
Calculating and Reporting CGT:
For properties sold below market value, individuals may be eligible for a tax refund. Professional property valuation, allowable expenses deduction, and application of tax reliefs are crucial elements in calculating the CGT. Payment is only required if a gain is realised after considering deductions and reliefs.
To navigate CGT successfully, individuals must:
- Report and pay any tax due on the property using the CGT on UK Property account within 60 days of selling, effective from 27th October 2021.
For further details, the HMRC website provides comprehensive information on these aspects. Educating oneself is paramount to avoiding penalties and interest. If you require additional information or assistance, our team at Whittaker and Co is readily available to guide you through the intricacies of Capital Gains Tax.