Downsizing? Here's how to avoid a large capital gains tax bill when selling

Downsizing? Here's how to avoid a large capital gains tax bill when selling

Downsizing could be the right decision for your lifestyle, but sometimes there capital gains tax implications to consider. We take a look…

Soaring house prices and record demand for larger family homes mean many downsizing older homeowners will receive enormous windfalls when they sell up.

The good news is that there’s usually no tax on the sale of your main residence. The bad news is that if there’s an overlap between moving into your new property before selling your old one, you might have to unexpectedly fork out thousands of pounds. That’s why it’s always advisable to kick start the sales process before you look to buy a new property.

Here’s all you need to know about capital gains tax…

What is capital gains tax?

This is a tax paid on any gains made and it’s effectively the difference between the price you paid for a property that’s not your main residence and the price you sell it for.

What can you deduct from your capital gains tax bill?

It’s good to know that you can deduct costs from your tax bill. Things like improvements made to the property whilst you owned it (e.g. a new bathroom or loft conversion) can be added to your initial outgoings, as can stamp duty and legal fees. You can also deduct expenses like solicitor's fees from the selling price. The figure that’s left is what will be taxed on.

Do you pay capital gains tax if you sell through a limited company? 

Capital gains tax is not paid by limited companies. Instead, companies pay corporation tax, which is a different type of payment. You won’t be entitled to use your capital gains tax-free allowance but, for higher rate taxpayers, you’ll be paying 19% corporation tax rather than the higher rate of capital gains which is currently 28%.

Do you pay capital gains on your main home?

In most cases, you won't need to pay capital gains tax when you come to sell your main home, because you will be entitled to 'private residence relief'. For the amount of time the property was your main residence, you’ll be in the clear. You also get an extra nine months exemption, even if you weren't living in the property during those nine months. 

Do buy-to-let investors have to pay capital gains tax?

Yes. The capital gains tax bill does come into play when you’re selling a buy-to-let property or a second home. This is why if you’re downsizing you effectively have an 18-month period to sell your original home before the property starts to become liable for capital gains tax. You shouldn’t struggle to sell in the current market but if you are, it’s worth checking that your property is listed for the correct price – with a quick and easy valuation. 

When is capital gains tax on a property due?

For UK properties sold on or after 27 October 2021, you'll need to pay the capital gains tax owed within 60 days of the completion of the sale or disposal. The current annual capital gains tax allowance of £12,300. This is the amount of profit you can make before the tax is applied. If your gains are under this amount in the tax year then there is no tax liability.

How much is my home worth?