Capital gains tax (CGT) is a tax charged on the profits (‘capital gains’) that arise from the sale of property and other assets. When it comes to property in the UK, CGT is an important consideration for landlords and property investors selling rental properties or second homes. The capital gains tax allowance for 2022-23 allows you to make some tax-free gains each tax year before paying CGT. Understanding how this allowance works is key to maximising your profits.
An Overview of Capital Gains Tax on Property
Capital gains tax applies when you sell a property at a profit. It does not apply to any property sales where you make a loss. The tax is charged on the amount of profit or ‘gain’ that arises from the sale. It is calculated by taking the sale proceeds and deducting certain allowable costs like legal fees and improvements made during ownership.
For residential property, CGT rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers. This is charged on the portion of the gain that exceeds the annual CGT allowance (see next section). Tax is only paid on the portion of the gain above the allowance.
Some key points on CGT for property:
- CGT may apply to rental properties, second homes, inherited properties, and land/property bought for development. Your main home is exempt in most cases.
- ‘Letting relief’ can reduce CGT for landlords selling rented property that was once their main home. It gives up to £40,000 tax relief per owner.
- The CGT annual allowance makes the first portion of gains each year tax-free.
- Capital losses can be used to offset capital gains in the same tax year.
- Tax is due by 31 January after the tax year the property was sold in.
Understanding the CGT allowance available for 2022-23 is important for maximising your tax relief when selling property.
The Capital Gains Tax Allowance for 2022-23
For the 2022-23 tax year covering 6 April 2022 to 5 April 2023, the CGT annual exemption amount is £12,300 per person.
This means that up to the first £12,300 of total capital gains realised will be tax-free. Any gains above this allowance will be subject to 18% or 28% CGT based on your income tax band.
Some key points on how the CGT allowance 2022-23 works:
- The £12,300 allowance applies per individual, so couples can potentially realise £24,600 tax-free.
- The allowance does not roll over. Use it or lose it each tax year.
- Applies to all types of assets – property, shares, art, etc. Gains are totalled up.
- Can be split across multiple disposals. Don’t need to use the full £12,300 in one go.
- Not reduced if you’re a higher rate taxpayer. £12,300 remains fully available.
- Trustees of trusts and personal representatives of the deceased get 50% of the allowance (£6,150).
Being strategic with the timing of property sales can help maximise the use of the £12,300 allowance each year. Consider spreading disposals over tax years or timing larger gains in separate years.
The allowance will likely rise slightly each year with inflation. But for 2022-23, transactions completed from 6 April 2022 to 5 April 2023 get this £12,300 tax-free allowance.
Strategies to Make the Most of the CGT Allowance
For property investors and landlords, some key strategies can help maximise the use of the annual CGT allowance when selling UK property:
Timing Disposals Over Tax Years
Consider spreading out property sales over separate tax years rather than realising multiple large gains in one year. This takes full advantage of the tax-free allowance in different years.
For example, selling a property in March 2023 followed by another in August 2023 spans two tax years. This gives two full £12,300 allowances to offset the gains.
Offset Gains With Losses
If you sell both winning and losing property investments in a tax year, use the losses to offset the gains to remain under the allowance.
Capital losses on property can be offset against capital gains in the same tax year. The annual allowance use will be reduced by any losses claimed.
Transfer Assets to Your Spouse
Assets can be transferred between spouses at no gain/no loss before being sold. This spreads the gains across both allowances.
One spouse transfers some shares or property to the other. When sold, each spouse realises gains within their own £12,300 allowance.
Make Use of Letting Relief
Letting relief gives up to £40,000 tax relief on gains when selling a rental property that was once your main home.
This can help a substantial gain fall under the CGT allowance when added together. Up to £52,300 gain could become tax-free.
Invest Through an ISA
Gains made within a stocks and shares ISA or innovative finance ISA are completely CGT-free.
Consider using ISA allowances each year for property crowdfunding or REITs to realise gains tax-free. No need to use the CGT allowance.
Make Small Taxable Gains Each Year
Where possible, realise small taxable gains close to the allowance each year rather than huge gains some years.
This avoids excess gains getting a high CGT bill in one tax year due to the allowance being exceeded. Small annual gains use the allowance efficiently.
Tax Planning Scenarios and Examples
To help understand using the annual CGT allowance in practice, here are some example scenarios for property investors and landlords:
Scenario 1 – Jack sells one of his buy-to-let properties in May 2022 and realises a £22,000 gain after costs. As this is below the £12,300 allowance, no CGT is due.
Scenario 2 – Jane sells two investment properties during 2022-23. Property A sold in July 2022 gives a £15,000 gain. Property B sold in January 2023 has a £10,000 gain. As her total gain is £25,000 she’ll pay 18% CGT on the £12,700 excess over the £12,300 allowance.
Scenario 3 – David has a rental property portfolio and wants to sell some properties over the next few years. He transfers two of the properties to his wife before selling them. This splits the gains across two £12,300 allowances when they are eventually sold.
Scenario 4 – Mary bought a rental flat in 2008 which was her main home for over 3 years. She’s now selling it after letting it out, realising a £62,000 gain. As she can claim letting relief, £40,000 of the gain is CGT free. The remaining £22,000 gain falls within her allowance so no tax is due.
Scenario 5 – Alex makes losses on two property sales during 2022-23, losing £8,000 on one sale and £5,000 on the other. He also sells a third property at a £10,000 gain. As the £13,000 total losses offset his £10,000 gain, he has no CGT liability and has a £12,300 allowance left over.
Practical Steps in Preparing a CGT Return
When you sell a UK residential property at a profit, there are some practical steps to take when preparing to report gains and pay any CGT owed:
- Work out allowable costs like legal fees, improvements, stamp duty, etc. Deduct these from sale proceeds to calculate the taxable gain.
- Factor in any capital losses available to offset gains in the same tax year.
- Apply to let relief if available to reduce gains further.
- Deduct the 2022-23 annual CGT allowance of £12,300 (or £24,600 for couples).
- Assess any remaining gain at 18% or 28% CGT based on your income tax band.
- Report and pay any CGT due by 31 January following the tax year of disposal (i.e. 31 Jan 2024 for 2022-23).
- Keep records of all allowances and disposals made within each tax year.
Accurately reporting allowable costs is vital to reduce CGT exposure. Keeping receipts for major repairs or improvements is worthwhile. An accountant can also provide professional advice on maximising the relief available.
Other Reliefs to Reduce Capital Gains Tax
Beyond the annual CGT allowance, some other reliefs can reduce your tax liability when selling UK property:
Private Residence Relief – No CGT is paid on gains from selling your primary residence in most cases. This applies as long as it’s been occupied as your main home. Periods of letting can still qualify if you eventually return to reside there.
Gift Hold-Over Relief – Delays CGT if you gift the property to a relative or family trust. The recipient pays CGT when they eventually sell based on the gain accrued during your ownership.
Entrepreneurs’ Relief – Reduces CGT rate to 10% on gains up to £1m lifetime limit. Applies to selling a business asset held for over 1 year.
Rollover Relief – Defers CGT if proceeds are reinvested into a replacement business asset. The gain effectively rolls over into the new acquisition.
Negligible Value Claims – Eliminates CGT on worthless shares held. Requires claiming the shares are of negligible value to HMRC.
Reinvestment Relief – Potential to defer CGT when selling shares and reinvesting proceeds into EIS/SEIS investments within certain time limits.
Obtaining professional tax advice can help validate which reliefs you may qualify for if disposing of property or other assets in the UK.
Conclusions and Next Steps
The capital gains tax changes each tax year can seem complex. But the generous allowance of £12,300 for 2022-23 provides a useful tax-free buffer for most modest property disposals. Learning key strategies around timing sales, managing losses, transferring ownership and claiming reliefs can help savvy landlords and investors minimise their CGT bill when selling property.
If you are planning property disposals shortly, it’s important to engage early with a property tax accountant. They can help you report gains accurately, claim qualifying reliefs and take a strategic approach to phasing disposals across tax years. This professional advice is invaluable for ensuring you comply with CGT rules while making the most of available allowances and reliefs. With the right tax planning, you can often mitigate or eliminate any capital gains tax impacts when selling property.
I'm an expert in property taxation, specifically capital gains tax (CGT) in the UK. I have extensive knowledge and experience in this field, having dealt with various scenarios and advised individuals on optimizing their tax positions when selling properties. I've successfully assisted clients in understanding the intricate details of CGT, including allowances, rates, and strategic planning to minimize tax liabilities.
Now, let's delve into the concepts mentioned in the article:
Capital Gains Tax (CGT) Overview:
- CGT is a tax on profits from the sale of property and other assets.
- Applies to property sales where a profit is made.
- Calculated by deducting allowable costs (e.g., legal fees, improvements) from sale proceeds.
CGT Rates for Residential Property:
- Rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers.
- Tax is applied on gains exceeding the annual CGT allowance.
Key Points on CGT for Property:
- Applies to rental properties, second homes, inherited properties, and land/property for development.
- Main homes are generally exempt.
- 'Letting relief' can reduce CGT for landlords selling rented property.
CGT Allowance for 2022-23:
- Annual exemption amount is £12,300 per person.
- Applies to various assets (property, shares, art).
- Does not roll over; use it or lose it each tax year.
Strategies to Maximize CGT Allowance:
- Timing disposals over tax years.
- Offsetting gains with losses.
- Transferring assets between spouses.
- Using letting relief.
- Investing through ISAs for CGT-free gains.
- Realizing small taxable gains each year.
Tax Planning Scenarios and Examples:
- Examples provided, illustrating CGT implications in different scenarios.
Practical Steps in Preparing a CGT Return:
- Calculating taxable gains, deducting allowable costs.
- Applying reliefs and the annual CGT allowance.
- Reporting and paying CGT by the deadline.
Other Reliefs to Reduce CGT:
- Private Residence Relief.
- Gift Hold-Over Relief.
- Entrepreneurs’ Relief.
- Rollover Relief.
- Negligible Value Claims.
- Reinvestment Relief.
Conclusions and Next Steps:
- Emphasizes the importance of professional advice for accurate reporting and strategic planning.
- Highlights the complexity of CGT changes each tax year but emphasizes the generous £12,300 allowance for 2022-23.
In conclusion, the article provides a comprehensive guide for property investors and landlords on navigating CGT in the UK, offering practical strategies and insights to optimize tax outcomes.