Selling a property in the UK can present a variety of challenges for solicitors and conveyancers, including the complex legislation surrounding Capital Gains Tax (CGT). Our private client tax experts have prepared this basic guide to assist you in understanding and navigating the CGT landscape on behalf of your clients.
You are required to pay Capital Gains Tax (CGT) if you profit from selling, or ‘disposing of’ an asset. You only pay tax on the profit, not the total amount you receive from the sale. Understanding CGT’s intricacies will ensure you can best advise your clients on how to comply with the rules and mitigate potential risks.
As solicitors and conveyancers, you play a crucial role in assisting clients in understanding and meeting their CGT responsibilities. You should be capable of providing advice on:
- Whether a CGT return needs to be filed
- How to calculate your client’s capital gain
- Your client’s eligibility for reliefs and exemptions
- The process for settling your client’s CGT liability.
If your client sold a property in the UK on or after 6th April (excluding their primary home), you must report and pay an estimated CGT. A CGT return must be completed online, even if no tax is payable.
If the completion date falls on or after 27th October 2021, the CGT payment is due within 60 days. For completion dates between 6th April 2020 and 26th October 2021, the deadline is 30 days.
Adhering to these timelines is crucial to avoid your clients facing additional fees and penalties.
Who needs to complete a CGT return?
You need to file a CGT report and payment when you sell or dispose of an interest in:
- A property that was not used exclusively as your primary residence
- A rental property
- An inherited property that was not used as your primary residence
- A holiday home in the UK.
Your client’s CGT is influenced by their income level and total capital gains for the tax year, which are only determined at year-end. Any CGT payments made within 60 days of the sale are provisional estimates.
It is essential to report the gain and tax paid on your client’s self-assessment tax return because their CGT liability may vary based on their final taxable gains for the year, potentially resulting in either an overpayment or underpayment.
Calculating the Capital Gains Tax
To determine your client’s CGT liability, calculate the difference between the sale proceeds and the initial cost of the property. For instance, if your client bought a house for £50,000 and sold it for £250,000, their capital gain is £200,000.
Residential property gains are typically taxed at 18% or 28%, depending on other taxable income. Taxpayers benefit from an annual CGT allowance, which is currently £6,000 for 2023-2024.
Married couples can combine their exemptions, providing a total capital gains exemption of £12,000 for the 2023-2024 tax year. When selling a rental property, eligible costs such as estate agent and lawyer fees, stamp duty, and improvement costs can be deducted. Maintenance expenses like painting are not considered.
CGT reliefs and exemptions
You are exempt from paying CGT when selling a property if:
- You own a single home, your primary residence, throughout your ownership
- No part of the home has been rented out, excluding having a lodger
- No portion of your home has been exclusively used for business purposes (occasional office use is not considered exclusive)
- The grounds, including all buildings, are less than 5,000 square meters
- The property was not acquired solely to make a profit
- The property is sold outside of the UK.
- The property is sold to your spouse.
If all apply to your client’s disposal, they will automatically qualify for tax relief, known as ‘Private Residence Relief’ and will not need to pay CGT. If any of these conditions are not met, your client may be liable to pay some tax. For properties owned before 1982, indexation allowance can reduce the capital gain by adjusting the costs according to inflation during ownership.
Paying Capital Gains Tax
After reporting their gains, HMRC will send them a letter or email with a payment reference number starting with ‘X’. To report and pay CGT on property sales, there are annual deadlines your client must meet:
- Report the gain by 31st December in the tax year after your client made the gain
- Pay the tax due by 31st January following the tax year of the gain.
So, if your client made a gain in the 2023-24 tax year (6th April 2023 to 5th April 2024), they would need to report it to HMRC by 31st December 2024 and pay the tax by 31st January 2025.
Meeting these reporting and payment deadlines is essential to avoid penalties.
Why is it essential for solicitors and conveyancers to have a good understanding of CGT?
Solicitors and conveyancers must understand CGT rules well to successfully advise clients on buying or selling property. As a solicitor or conveyancer, you must know the annual CGT exemptions, any allowable deductions, reporting time limits, and how and when to pay CGT.
By being aware of these CGT implications of property disposals, solicitors and conveyancers can help their clients avoid unexpected tax bills and penalties. Good CGT knowledge allows better tax planning.
Allow us to assist you with strategic tax planning to help your clients plan how to manage CGT exposure. Leverage our expertise and contact our private tax team, where we can help you, help your clients further!