Selling a property can often be long-winded as you try to find buyers and sift through the mountain of legal documents. However, aside from the estate agent and solicitor fees, there are some additional taxes that you may face depending on what your house is used for and if you own any other properties.
It’s helpful to budget in advance when you sell a property so that you know how much money you have to save or invest elsewhere. It’s a good idea to find out what fees and taxes you may face when selling your property so that you can factor them in.
In this guide, we’ll look at the type of taxes you may face when you come to sell your property, including how the taxes are calculated and the tax brackets.
Do you pay tax when you sell your house?
You won’t pay Income Tax when you sell your house. You also won’t pay Capital Gains Tax when you sell your house if it’s the only property you own and you’ve used it as your main home for the entire time you’ve owned it. However, you will have to pay Capital Gains Tax if you have let it or used any of the rooms exclusively for business purposes. You will also have to pay the tax if the grounds on which the house sits are larger than 5,000 square metres. If these factors don’t match the use or size of your property, you will automatically receive a tax relief called Private Residence Relief.
If you have used your home for business or to make a profit, you may have to pay some Capital Gains Tax when you come to sell your house. The amount you pay in Capital Gains Tax will depend on the gains you made when you sold the house. This is the difference between the price you bought your house for and the price you sold it for.
Capital gains tax when selling a property
Capital Gains Tax (CGT) is something you pay when you sell or ‘dispose’ of an asset (including properties) and profit from the sale. You only pay tax on the profit rather than the full amount that you sold the property for.
Disposing of an asset doesn’t have to mean that you sold it. The term also encompasses giving the property away as a gift, swapping it for something else, or getting compensation because the property was damaged or destroyed.
Capital Gains Tax rates
The rate you pay as a basic rate tax payer on the sale of a qualifying property will depend on several factors. These include the size of your gain (profit from the sale of the house) and your taxable income. You may pay a different tax rate on the sale of other types of assets. If you pay a higher tax rate, you’ll need to pay 28% on gains made from the sale of a residential property.
You will have to pay Capital Gains Tax on the overall gains you make that exceed your tax-free allowance. The allowance is currently £12,300 or £6,150 for trusts. These are the same allowances that were in place during the tax-year 2020 to 2021.
Tax rate calculation
To determine the tax rate you pay on the qualifying sale of a property, you need to calculate how much taxable income you earn. This is your income minus Income Tax reliefs and your Personal Allowance. You then need to work out your total taxable gains, which is the profit you made from the sale of your property.
After you have worked out the taxable gains made from the sale, you need to deduct your tax free-allowance. For example, your allowance may be £12,300, and you made a £50,000 profit from the sale of your house, which would leave £37,700. Next, you need to add this amount to your taxable income.
If the taxable gains plus your taxable income falls within the basic Income Tax band, you will need to pay 18% on the gains from the sale of your residential property. It would be 10% on the gains from any other type of asset gains. In the instance that the taxable income and taxable gains exceed the basic tax rate, you would need to pay 28% on a residential property or 20% on other types of assets. Trustees and businesses must also pay 28% on residential properties.
Your tax-free allowance can be used against the gains that would incur the highest rates (for example, the 28% rate).
Inheritance tax on property
You need to pay an inheritance tax on the estate when someone dies, and you inherit (are left) their property, money and possessions. The standard rate is 40%, which must be paid on anything above your tax-free threshold. You don’t have to pay Inheritance Tax if the estate’s value is below £325,000 or it is left to one of the following:
- the spouse or partner of the deceased
- a charity
- a community amateur sports club
The threshold increases to £500,000 if the estate is instead left to the children (including step and foster) of the deceased or the grandchildren of the deceased.
You won’t pay Capital Gains, Income Tax or Stamp Duty straight away if you inherit a property. HMRC will contact you if you do need to pay any tax on the property. The property may increase in value between the time you inherit it and when you come to sell it, so you may need to pay Capital Gains Tax on the price difference.
In the instance that you own two properties after inheriting one, you must tell HMRC which property is your main residence within two years. If you don’t inform HMRC, they will decide if a property was your main residence when you come to sell it.
If you decide to rent out the inherited property, you may have to pay tax on the income you make. You will have to pay Class 2 National Insurance contributions if you earn £6,725 or more a year in rental income and being a landlord is considered to be your main job.
Tax when selling your primary residence
You don’t have to pay tax when selling the house you live in, which is referred to as your ‘primary residence’. However, you would have to pay Capital Gains Tax if you rented out part of the property (excluding lodgers) or if you used any part of the property exclusively for business purposes (such as a home office). You would also have to pay tax if you bought the property with the intention of using it to make a profit.
Tax when selling a second home
You must pay Capital Gains Tax if you sell a property that wasn’t your primary residence, such as a holiday home. This also includes buy-to-let properties and inherited properties that you didn’t live in full-time. The sale of the property and the required Capital Gains Tax must be reported to HMRC within 60 days.
The disposal of your second home won’t be subject to Capital Gains Tax if you gift it to your partner, spouse or a charity. You may not have to pay if a dependent relative lives in the property too.
Fees when selling a house
Estate agents usually charge between 0.75% and 3.0% commission of the property’s selling price. You may also have to pay between £850 and £1,500 towards conveyancing costs, which is usually divided between the legal fees for the conveyancer or solicitor and any third-party costs (such as search fees).
You will have to pay Stamp Duty on properties that are sold for over £250,000. Although it varies, the current Stamp Duty rates are as follows:
- Properties sold for between £250,001 to £925,000 – 5% tax
- Properties sold for between £925,001 to £1.5 million – 10%
- Properties sold for over £1.5 million – 12%
First-time buyers don’t have to pay Stamp Duty on properties bought for under £425,000 and only 5% on properties sold for between £425,000 and £625,000.
Aside from the fees associated with buying a property, you will also face additional charges such as removal fees and the cost of an Energy Performance Certificate (EPC), which usually costs between £60 and £120. The certificate rates how energy efficient a property is and can be bought on your behalf by an estate agent or from an independent registered vendor on the government EPC register.
How to reduce expenses when selling a house
A lot of paperwork is associated with the legal aspect of selling a house, which is where solicitors can help. However, it’s a good idea to approach a few solicitors for quotes to find out what they charge so that you can opt for someone more affordable. You may be able to find a solicitor that is willing to accept a lower commission in comparison to other people you ask.
Estate agents will charge you for listing your property and taking a percentage of what your house sells for. Luckily, you don’t have to work with an estate agent to sell your house. Instead, you could take on the role of an estate agent and find a buyer for your property to save on estate agent fees. While this is the cheaper option, you must remember that you will have to advertise, show potential buyers around and negotiate on price yourself.
An alternative to estate agents is going through a home-buying service. Selling to this type of service will save you money on estate agent fees, but you may get paid less than the property’s true market value.
You can lower the amount that you pay for Capital Gains Tax by making the most of your Personal Allowance. For the tax year 2022/2023, the allowance is set at £12,300, which can’t be rolled over into the following year. This means that you can make up to £12,300 from your assets before you have to start paying tax. You can transfer assets to your partner as they will also have a tax-free allowance of the same amount that you can both use to your advantage.
Another way to lower your Capital Gains Tax is to pay money into ISAs where your savings will be tax-free. You could also pay money into your pension, as this will potentially alter your Capital Gains Tax bracket.
Do you pay tax when buying a property?
Yes, there are certain taxes that you will have to pay when you sell your property. However, this can vary depending on the price of the property and the government’s current tax rates. When you sell your house, you may have to pay Stamp Duty and Land Tax, as well as Capital Gains Tax (if the property qualifies). Stamp Duty is a type of transaction tax you must pay on property purchases over £125,000 (or £425,000 for first-time buyers). The buyer always pays the Stamp Duty, which means that you will have to pay it when you purchase a property but not when you sell one.
The government sometimes issues a Stamp Duty holiday when the property market is struggling. It means that buyers who purchase properties under a certain amount (such as £500,000) don’t have to pay Stamp Duty.
Selling a house won’t count as income if it was your main residence and you didn’t let it out or use it for business purposes. However, you will have to pay taxes on the sale of a property if it wasn’t used as your main residence, you rented the property out or you had a home office. You will also have to pay tax if you bought a house as a type of investment property to profit from its sale.
Capital Gains Tax must be paid on the taxable gain you make from selling an asset, as long as it is over your Personal Allowance. You will therefore have to pay tax on the price difference between the purchase and sale price of the property, as long as it is over the Capital Gains Tax Allowance of £12,300.