When you’re selling a property, you want to be aware of all the financial implications that doing so might mean for you. This includes capital gains tax or CGT. Plan right, and you could reduce the amount that you’ll have to pay, and in some cases, you may be able to avoid paying it.
CGT is paid on the money that you make when selling an asset, such as a property. The capital gain, or, in some cases, the capital loss, is the amount between the price you paid for the property and what you sold it for. It doesn’t include any fees that you may have paid when purchasing the property. What this means for you is that if you sold the property for more than you paid for it, you have made a gain, and if you’ve sold it for less, you’ve made a loss.
Below is a guide to avoiding capital gains tax. Of course, you should always seek professional advice for your circumstances, but this is a useful starting point.
Do you always have to pay CGT?
The good news is that you don’t always have to pay Capital Gains Tax. If the property is your main home, then you won’t have to pay it.
It also won’t apply if you bought your property before 20th September 1985. However, improvement works, such as major renovations or extensions, could be considered an asset and may, therefore, be subject to CGT.
Small businesses may not need to pay CGT if the property is used for business. The taxpayer will also have to go through various tests to see if they are eligible not to pay.
How can you avoid paying it or reducing it?
There are ways to avoid paying CGT; one of them we have already discussed, which is when the property is your main home.
As well as this, you can avoid it with the temporary absence rule. This is where you buy the property to be your main home and act as though the property is your main home. You can still rent out your property for up to six years. Before the six years is up, you would have to move back in before renting it out again or selling it so that it could be counted as your main residence.
You can also use a property asset as a future pension. By doing this, your CGT would be 10%, which is lower than a lot of tax rates.
Timing can also play a part in how much CGT you will be paying. For example, if you are paying lower marginal tax rates because your income is lower, you will also have to pay less CGT. In this case, if you’re expecting a pay rise at work, you might be better off selling your property first.
You will get a 50% discount in CGT if you have owned a property for more than 12 months, so it could work out to hold off selling, especially if you have renovated to increase the value of the property.
Seeking professional advice for your circumstances can help you to get the best results for your situation and give you more information about the methods above.