How to avoid a Capital Gains Tax penalty when selling a residential property
If you’ve recently sold, or are currently selling a residential property, understanding Capital Gains Tax (CGT) and your obligations will help you avoid being hit with a penalty.
Since 6 April 2020, when a residential property’s disposed of and you have a tax liability, you’re required to complete a CGT return for HMRC.
It pays not to hang around, as you’ll only have 60 days from the date of completion to ensure your CGT form’s submitted.
You’ll also need to make the payment for the Capital Gains Tax at the same time the form’s submitted.
If you’re selling your home, Private Residence Relief means a CGT return isn’t required. For the criteria of Private Residence Relief, see the ‘Does Capital Gains Tax Apply to me?’ section.
WHAT’S CAPITAL GAINS TAX?
When you make a profit through selling or disposing of an asset, you’ll be taxed on the gains made.
The gain is classed as the profit only, not the total amount of money you received for the sale.
You can also deduct from the taxable gains of any costs associated with a disposal (and further purchases) such as legal and property agent fees.
DOES CAPITAL GAINS TAX APPLY TO ME?
The 60 day CGT rules apply to individuals, joint owners, trusts, partnerships, Limited Liability Partnerships (LLP), and personal representatives of the estate.
If you complete an annual tax return, the disposal must also be included on your return.
You don’t pay CGT when you sell your home. This is known as Private Residence Relief and will apply if:
- You have one residential property which you’ve lived in as your main home.
- You’ve not let all, or part, of your property out. This excludes having a lodger.
- The property grounds, including all buildings, are less than 5,000 square metres (approximately one acre) in total.
- You didn’t buy the property just to make a gain.
However, if you’re disposing of a Buy To Let, rental or a mixed use property, you’ll be taxed on the gains made.
If you’re a self-employed sole trader or in a business partnership, you’ll pay CGT on chargeable business assets. For more information for businesses, read our blog ‘How Changes To Capital Gains Tax Could Impact Your Plans To Sell’. Limited companies will pay chargeable gains through Corporation Tax.
WHAT HAPPENS IF I MISS THE 60 DAY WINDOW?
In our experience, the need to complete the form’s often missed by those disposing of the properties.
If you miss the 60 day window, there can be late filing penalties charged along with interest on unpaid tax.
TALK TO US
If you’re planning the disposal of a property, or you’re a solicitor or estate agent advising your customers, talk to us before the sale’s complete and we’ll inform you if a CGT return’s due.
If you’ve recently disposed of a property and are unsure if these obligations apply to you, please contact us today for further information.