If you’re thinking of selling your house in the UK, one of the questions you may be wondering is whether or not you have to pay tax on the sale of the property.
Not only is it an extremely common question but it can also be a bit confusing to fully understand before you go ahead with the sale.
You need to work out what your budget is and that means figuring out the cost of moving then you’ll also have to look at the length of time it takes to sell. And when this is dealt with you may have to pay tax too.
In general, you usually don’t have to pay tax when you sell your main home. The two main taxes associated with buying and selling houses – capital gains tax and stamp duty – don’t apply to selling your main home.
So if you’re selling a house with a mortgage you have paid off you would benefit from some form of tax relief.
However, if you’re selling and buying, then stamp duty will come into play. If all of this sounds a bit confusing, don’t worry. We’re here to help break it all down for you.
Do you pay tax when selling a house?
Yes, there are a few taxes you have to pay on property and as you may have worked out from the introduction, this depends on the type of property you’re selling.
So long as you come to an agreement with your partner if you’re selling a shared ownership property, things are pretty straightforward following the below guidance.
How does tax differ when you live in the property?
When you sell your home, you often are not required to pay Capital Gain Tax (CGT) taxes. Your “principal residence,” which is simply a technical term for the house you really live in, is exempt from this tax
You may now be able to decide which of your homes, if any, counts as your primary residence if you happen to own more than one.
So, you’re in luck if you’re selling the house you actually live in as there won’t be any capital gains tax due from you and you can keep the money from the sale in its entirety.
How do taxes work on second homes and buy to let properties?
While trying to make profit from property, you may intend to sell one or more of your investment properties which is a buy to let or a second home because you own them and want to get rid of them.
You might, however, be liable for capital gains tax and it’s important to know for sure if you aren’t because if the government finds you owe tax in the future you will have to pay it back with interest.
More about paying back capital gains tax with interest can be found using this article here. To answer the question, you will have to pay taxes on your gain if you sell a property that isn’t your primary residence.
In order to reduce your tax burden, the majority of people who own two residences now designate one of their properties as a “primary residence.”
This allows them to benefit from principal residence relief which allows landlords in some cases to benefit from significant financial savings.
There are several circumstances, nevertheless, in which you might not be qualified for this benefit and in these cases it is useful to bring in a solicitor to sell your house.
It’s crucial to comprehend how to calculate capital gains tax if you do owe it. In essence, you’ll pay taxes based on the profit you make from selling the property, not on the whole sale.
This means you can deduct a lot of expenses to lower your tax obligation by subtracting costs such as estate agent fees, solicitor fees, and any work you’ve done to increase the worth of the home.
What Are The Taxes involved when Selling A House?
When it comes to selling a house there are four main types of tax you have to think about paying. This includes, capital gains tax, inheritance tax, income tax and stamp duty and land tax.
These taxes are talked about below so you can understand how they work and understand how they are able to be applied to the property and when they must be paid.
Capital Gains Tax (CGT)
As discussed above, if you want to sell a house for a profit, you will be subject to this tax but only in situations where the property is not your primary place of residence.
Based on the proceeds from the sale of the property, this tax is then calculated.
For instance, if the home is worth £200,000 when the owner dies but you sell it for £350,000, you’ll be taxed on the £150,000 profit you gained.
On this additional gain, basic rate taxpayers pay 18% in taxes, while higher or additional rate taxpayers must pay 28%.
Inheritance Tax
Many are not aware that if you inherit a property that is worth more than £325,000, inheritance tax is required to be paid within six months after the person passes away.
Also, you will be given interest if you don’t make your payment within this period. It’s a substantial tax, with a 40% rate applied to everything valued beyond the threshold.
Hence, if the house is worth £425,000, you will be charged 40% of £100,000. Making sure you’re aware of these rules so you can prepare for death in an attempt to offset your tax is quite important.
Income Tax
As a landlord and only if you’re a landlord will you have to pay income tax on the income from a property. You will have to find the profit of a property and then pay the tax on this profit amount if you’re renting to tenants.
There are also new laws surrounding how this tax works that were finalised in 2020, so familiarise yourself with this by learning about section 24.
You can check out these personal income tax bands for yourself on the government website here and also how to get around paying income tax by becoming a lodger.
Stamp Duty
Did you know that in England or Northern Ireland, you must pay stamp duty when you purchase a home or piece of land over a certain amount?
This tax only applies to buyers and you only have to pay it if you’re purchasing a home at the same time that you’re selling one.
When you buy a freehold home, a leasehold, a property through a shared ownership programme, or if a property is transferred to you in exchange for money, stamp duty may be due.
The value of the property determines how much tax you must pay and has gotten less expensive recently as in the past, stamp duty was only charged on the first £125,000 of any transaction.
Now, the first £250,000 of a property purchase is now exempt from stamp duty due to recent amendments.
A buyer must then pay 5% of the home’s value if it is between £250,001 and £925,000, 10% if it is between £925,001 and £1.5 million, and 12% if it is over that amount.
If you’re selling a house with an estate agent they should be able to give you some advice on this topic as they would have experience on selling property in different thresholds
When is it not applicable to pay taxes on a property?
There are a few situations where no tax is able to be paid on a property and being aware of these situations is crucial. It could be the case that you’d rather do a method below than sell your property as you’d then have to pay tax.
These situations include using a property as a gift, using a property for the purpose of a business asset and also having private residence relief.
When you’re using property as a gift
It is possible to change who owns a piece of property without doing any transaction. This is made possible by doing a “gift deed” and “gift transfer,” which both refer to the same thing and are used to describe this process.
While carrying out a deed of gift may seem difficult, it is not impossible. Before you begin thinking about it, there are a few things you should bear in mind.
First and foremost, the property owner must be fine with this and consent with it going ahead.
Also, there should be no outstanding debts that are secured against the property in question so the mortgage must be paid off in full.
Finally, the property documents maintained by the Land Register should show that the owner is the person who is giving this consent and only then can you transfer the ownership of the home.
When you have private residence relief
You won’t need to be concerned about capital gains tax if you’ve constantly lived at your primary residence.
This is because you’ll have private residence relief. There are several scenarios that won’t result in a seller having private residence relief, despite the fact that you may have physically left your property.
When you have private residence relief relief as if you’re still residing there, it’s referred to as a “deemed occupation.”
What happens if you buy and then sell at the same time?
Buying and selling a house at the same time is something that most homeowners have to do in order to move on in the buying process. This is known as being involved in buyer chain,
As a result, it could be that you run into issues in the sale and worse yet are left confused as to what tax you have to pay and when.
Do you have to tell HMRC?
When you buy and sell at the same time, you should inform HMRC when you sell your property rather than when you buy. So, if you have a period in between where you’re buying, this is a great time to start applying for tax.
Is the money from a property sale classed as personal income
Technically, the money from the sale of a property is not classed as personal income because after you have paid tax on the money you’ve made from the property there is no income tax left to pay.
However, if you have listed a property as a company in a limited company, you’d then have to pay yourself a salary to benefit from the money made. This means you’ll have to pay tax on this income in this sense.
For instance, if you made £350,000 from the sale of a property, if you were to pay yourself the same amount as a salary in a single tax, you’ll then have to pay this to yourself at the highest tax rate.
This is why it is a popular choice to take this money and reinvest it in property and then pay yourself from the cash flow this new investment makes or just grow your money within the company.
If you sell a house and don’t buy another house, what happens to the money?
If you sell a house and you don’t buy another house, after you have paid off all the tax you need to, you will be left with cash in the bank that you can do whatever with.
However, if you’re selling a house with a mortgage, you may need to pay off the mortgage first in which case you’ll be left with less money at the end of the deal.
How do quick house sale companies work?
The average time from listing a home on the open market to getting a sale of a property through a private buyer is around four months. With the help of a quick house sale company, this can be as little as a week.
It is so quick because usually these companies buy your property form you at a discounted rate and usually pay in cash and there is no mortgage application process necessary.
They then make a profit by selling the property on to a third party at a commission. This is useful if you need to sell your property in an emergency like if you need to pay for care for instance.
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