Capital Gains Tax on Property

Ask the Expert

“My husband and I bought a second home as tenants-in-common in 2005 for £350,000. The property is now worth £775,000, and over the years, we have spent roughly £150,000 on renovations. As we are nearing retirement, we have decided to sell this property, but we are worried that we’ll have to pay a large Capital Gains Tax bill. Is that correct?”

Carl responds:

As a homeowner, you will not be required to pay Capital Gains Tax (CGT) when selling your main residence, as you will receive Private Residence Relief (PRR). To receive PRR, you must have nominated your main property within two years from the date when you first acquired your additional property. However, if you do not nominate your main property within the two-year timeframe, HMRC will decide which property qualifies for PRR. This decision will be based on where you are registered to vote and where your vehicle is registered.

To calculate your potential liability on your second property, you will need to work out how much you initially paid for the property, in addition to the cost of any improvements and any initial outgoings such as stamp duty and legal fees. Your gain is the difference between your costs and what you will get when you sell.

The taxable gain will be split equally between you, and the rate of CGT you pay will depend on which tax bands the gain falls into when added on top of your income – any taxable gain falling within the basic rate band will be taxed at 18% and any gain falling above the basic rate band is 28%. The annual CGT tax-free allowance for the 2021/22 tax year is £12,300, which you can each deduct from your share of the capital gains – this figure will stay the same in the 2022/23 tax year. If you have made any losses when selling other assets, you may use these to offset your gains. For example, if you owned another property and made a loss of £50,000 when selling it, you could use this against the gains you make from selling the property in question. Any CGT owed must be paid within 60 days of the completion of the sale.

I would recommend speaking to an Independent Financial Planner to ensure that you optimise the allowances available and adopt the most tax-efficient route for you and your husband. A Financial Planner can also help you with retirement planning by analysing your current and future income, other savings and investments, your family circumstances, and your general expectations for retirement.

Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority