How to Calculate Capital Gains Tax
Selling a property in the UK will often come with a variety of financial commitments or obligations.
One such obligation is the capital gains tax that is payable upon the sale of a property. Landlords frequently encounter several questions and uncertainties concerning what capital gains tax is and how it operates.
This article will clarify these questions and how landlords can calculate it for their properties.
What is capital gains tax?
Capital gains tax on property
Capital gains tax is a tax that landlords will often have to pay upon the sale of their property. If you are selling a house for more than you bought it for, you might need to pay capital gains tax on the price difference. Fortunately, such a tax only applies to second homes or rental properties (buy to let), separate from the landlord’s own home. So, if a landlord is selling their main house, they can keep all the sale proceeds. Landlords pay 18% capital gains tax if they are a basic rate taxpayer and 28% if they are part of a higher tax bracket.
It is useful to note that the government grants a capital gains tax-free allowance of £12,300 per annum to all landlords. Furthermore, if you don’t profit from the sale of the property, the loss can be knocked off your capital gains tax bills in the future, where landlords can offset losses from up to four years ago.
How does capital gains tax affect landlords?
Furthermore, the capital gains tax can push away investors and entrepreneurs from real estate ventures due to the additional risk burden it introduces to the whole transaction. That being said, in some cases, capital gains tax can boost risk-taking. In cases where the property investment incurs a loss, the investor can get most of his money back, thanks to full loss deductibility.
How to calculate capital gains tax
Landlords should use the purchase and sale price of a property to calculate the sum subject to capital gains tax. To reduce the taxable sum, landlords can deduct buying and selling fees from the profits (e.g., the fees you pay to an estate agent) or if a landlord has spent money on improving a property. In both cases, the invested money, whether before or during the property’s sale, counts against the profit and can be subtracted from it to reduce the taxable sum you pay capital gains tax on.
Once the sum subject to capital gains tax is determined, landlords will be classed into different tax bands. As it currently stands, capital gains tax in the UK is :
| Tax payable | Tax percentage | Income |
| Capital gains tax | 18 | Up to £50,000 |
| Capital gains tax | 28 | From £50,000 |
The details and tax brackets cover the basic capital tax gains calculations. There are, however, a number of nuances and subtleties that can arise during the payment of capital gains which can affect the end percentage or tax-deductible sum.
Capital gains tax calculators
The most straightforward way to calculate your capital gains tax is through the government provided capital gains tax calculator. By answering several questions, landlords provide information linked to the sale of their property and, depending on the input data, the calculator will produce a sum identifying the capital gains tax bracket that the landlord falls into.
