After successfully selling your house, you may be wondering what it is you need to do next in regards to tax.
First, you should check to ensure that you qualify for private residence relief. The UK Government relieves homeowners of taxation if:
- The house is not used for any financial gains
- You have not let part of it out. You can still enjoy exemption if you host a single lodger
- The total acreage of the house is 5.000 square meters or less
- The house is the only other property you own, and you have been residing in it form the time you purchased it
- You have not used part of it for any businesses
- It is not inherited property
- The house decreased in value from the time it was bought
- If it was a gift given as part of a compensation deal for personal damages or injuries
- You acquired the house through a lottery
It is essential to note that the exemption is possible on one house, which means that married couples and expats with more than one residence will have to choose one home to be exempted from the tax policy. In case you do not meet all of the above criteria, you will have to pay Capital Gains Tax as required by the UK Government.
Here is a breakdown of this tax and what is expected of individuals who are to pay the amount.
What is Capital Gains Tax?
Capital Gains Tax is the amount of money levied on a property sold for profit. For you to determine the taxable amount, you deduct the original purchase price of the home from the current sale price. The profit made from the house sale is what qualifies to be taxed. After this, you have to deduct other costs that you incurred during the sale, which include:
Broker or the agent fees – Real estate fees vary depending on some variables that include the value of the house, VAT, the type of agency you consult, and the terms and conditions set by each agency.
Stamp duty that you paid for when buying the property –When purchasing a property, you have to receive stamp duty to seal the deal. You can subtract the amount you paid for the stamp duty at the time you were purchasing the home from the sale profits.
You should also deduct any amount of cash you used to make improvements to the home while you owned it. This should not include any funds used for maintaining the house.
If the taxable amount is above the primary levy band, individuals are charged 28% of that amount as CGT. Anything below that rate receives a 10% deduction, making the rate a whopping 18%.
Another tax category that homeowners have to pay once they sell their property is an inheritance tax. If the property was solely for residential purposes, the receiver of this gift is required to pay some amount of cash as per the inheritance tax bill. However, if it was a rental premise, the funds are deducted from the rent in a lump sum or instalments depending on the agreement.
However, a few individuals can be exempted from incurring this cost. These are the home owner’s spouses and children or any other direct descendants of the deceased. The direct descendants of an individual, in this case, including their biological children and foster ones, grandchildren, great-grandchildren, adopted children, stepchildren, or any other kids that were under the guardianship of the deceased while he or she was alive. Spouses or civil partners of children, grandchildren, and great-grandchildren are also included in the exemption.
Other relatives who are not included in the list above including parents and siblings do not benefit from the exception. Aside from the family exemption, other beneficiaries can also skip on the taxes if the property they receive is less than or equal to 325,000 Pounds.
How to Calculate Inheritance Tax
Inheritance tax is usually deducted from the amount of money that exceeds the designated threshold. For instance, if your inherited property is valued at £600,000 and the limit is at £325,000, your taxable amount is 275,000 Pounds. The government takes 40% of this amount while the rest you are left to keep. However, this amount can reduce by 4% if the deceased gave at least 10% of the net value of the property to charity.
Who Pays Inheritance Tax to HM Revenue and Customs
Once you receive an inherited property, you can opt to sell or keep it. If the latter is what you resolve to do, you are liable for all the tax payment incurred from the sale including Capital Gains Tax, broker fees, and stamp duty. If you choose not to sell the property, the executioner is the one who is liable for paying the taxes as the initial owner of the house directed them.