There are plenty of costs to consider when selling your home.
Estate agent fees, solicitor fees, searches (land registry, local authority searches etc) and removal fees can all mount up.
It will probably come as a relief, then, to learn that paying tax on the sale of your property isn’t an additional expenditure to factor in.
Sellers can be subject to capital gains tax, but this is only applicable to those with a second home or a portfolio of investment properties.
Does selling a home incur greater personal tax liabilities in the UK?
There are two types of tax attached to the process of buying and selling properties: stamp duty and capital gains tax.
The former only incurs as a buyer, though clearly has a direct impact in most cases as homeowners generally sell to buy.
It’s an essential tax to budget for given charges can go into thousands, or even tens of thousands, of pounds.
For example, if you were to purchase a house for £295,000, and it was the only property that you owned, then the Stamp Duty Land Tax owed would be £4,750.
That’s because buyers pay 0% on the first £125,000, 2% on the next £125,000, and 5% on the final £45,000 (the portion from £250,001 to £925,000).
Meanwhile, with house prices back on the rise, the Capital Gains Tax (CGT) payable for buy-to-let investors and landlords/homeowners with multiple properties has also heightened.
CGT, payable on property that is not considered to be your ‘primary residence’, is taxed on how much your buy-to-let property or second home went up in value.
Capital Gains Tax is charged at 18% for standard rate taxpayers when it comes to property sales and 28% for higher rate taxpayers, though fees associated with the transaction, such as estate agent fees, solicitors fees etc, are deductible.
All taxpayers are eligible for an annual CGT allowance, meaning they’re able to make tax-free capital gains of up to £12,300, while couples who jointly own assets can combine their CGT allowance.
Is selling as a limited business a better alternative?
This is a common question that we’re often asked here at Hull Cash Buyers so let us try and clear this one up for you.
The answer is highly dependent on your circumstances, including the size of your property portfolio and the potential for forecasted personal growth as a landlord in the market.
For a standard seller, operating in a typical sell-to-buy transaction, it makes very little sense to go through the rigmarole [albeit not too much hassle] of setting up a limited company that will, ultimately, have very little benefit for you.
Even as a homeowner with a second property, or a landlord with a modest buy-to-let portfolio, it really isn’t worth complicating the process when there’s very little to gain from it.
Whilst it might be the case that you’ll be subject to capital gains tax in the case of a second home/buy-to-let sale [charged at 18% for standard rate taxpayers when it comes to property sales and 28% for higher rate taxpayers], taxpayers are eligible for an annual CGT allowance [tax-free capital gains of up to £12,300], which doubles if assets are co-owned. That, along with ratified deductions (estate agent fees, solicitors fees etc), can make a real difference.
However, there is a scenario when it would make absolutely perfect sense to make the switch and sell as a limited entity.
If the purpose of your business is to buy and sell property, you’ll be taxed in one of two ways, which is dependent on how you trade.
A sole trader or partner would be required to pay income tax on any profit made from rental income or property sales while a limited company would pay corporation tax.
In the case of private landlords, profit margins are taxed via income tax in tandem with other annual earnings, such as a regular salary, shares or dividends.
The standard personal tax-free allowance is £12,571, which reduces if your income is more than £100,000, while the ‘basic rate’ on anything up to £50,000 is taxed at 20%.
The higher rate, a window between £50,001 and £150,000, is taxed at 40% while an ‘additional rate’ over £150,000 is charged at a whopping 45%.
This is why landlords choose to invest in property via a company with limited status, because the corporation tax rate for LTD business is currently 19%, due to rise to 25% by 2023, which makes a considerable difference.
At these rates, if you are a higher-rate taxpayer, and you have plans to expand your empire, you stand to make a quite lucrative tax saving on any profits made from your properties if selling as a LTD entity rather than a sole trader.
Always consult a professional
Reading into the legalities around property tax can often feel like a bit of a minefield.
Pages and pages of what appears to be nonsensical jargon to some can be quite intimidating.
Evaluating which forms of tax a seller is liable to pay and understanding the various tax bands can be a real headache.
Who does Capital Gains Tax (CGT) apply to and what is it charged at? How do you know whether it’s more beneficial to act as a sole trader or limited business?
Which taxes apply in those respects, what percentage are they charged at, and when can it pay to switch from one to another?
Hopefully we’ve answered some of those burning questions in our blog, but at Hull Cash Buyers we would always recommend consulting a professional and listening carefully to their expert advice.