A homebuyer’s guide to stamp duty and capital gains tax when buying and selling residential property

Buying a house is one of the biggest financial decisions many of us will make in our lives. Not only is it a highly complex process, from applying for mortgages to engaging with a solicitor to help navigate the conveyancing process, but budgeting for a house itself requires factoring in many different costs. The tax associated with both buying and selling makes up a significant portion of the overall cost. That’s why our team have created this guide so that you can understand when you’ll be liable for property taxes, how much you may have to pay and any tax reliefs you may be eligible to claim.

Stamp duty land tax (SDLT) for first time buyers

When you’re buying for the first time the stakes can feel even higher. It’s likely to be the biggest purchase you’ve made in your life so far. Therefore, ensuring that you’ve budgeted accurately for it is crucial to securing your dream first home. Understanding how much you will need to pay in SDLT is an essential part of this.

SDLT is a tax that needs to be paid when you buy land or property over a certain amount. This includes when you buy a freehold property, a new or existing leasehold property, property through shared ownership schemes as well as buying into a share of a property. First-time buyers pay no SDLT on properties valued up to £300,000. If the property price exceeds this amount, SDLT becomes payable at a rate of 5% on the portion of the price between £300,001 and £500,000. However, if the property you are purchasing costs more than £500,000, then the first-time buyer relief no longer applies, and the standard SDLT rates must be used instead. This means that if you buy your first home for £450,000, you will pay no SDLT on the first £300,000 and 5% on the remaining £150,000. Your total SDLT bill will be £7,500 so factor this in on top of your purchase price.

If you are a parent helping your child to buy their first home, then you may find our article on how you could be taxed when helping children buy a home useful.

What are the standard rates of Stamp Duty Land Tax (SDLT) when buying a home?

If you are already a property owner and are looking to buy your next home (this also includes where you have inherited a property but are looking to buy one for the first time) then you will be subject to the standard rates of SDLT. The rates of tax increases depending on the total value of the property. You pay:

• 0% tax on property value up to £125,000
• 2% on property value between £125,001 – £250,000
• 5% on property value between £250,001 – £925,000
• 10% on property value between £925,001 – £1.5 million
• 12% on any remaining value of the property over £1.5 million

So again, say you are buying your next property for £450,000:

• The first £125,000 is tax-free
• The amount between £125,001 – £250,000 is charged at 2% which is £2,500
• The amount between £250,001 – £450,000 is charged at 5% which is £10,000
• Your total SDLT bill is therefore £12,500

What is the SDLT surcharge on second homes?

In the UK, if you already own a residential property and buy additional residential properties, you’ll be subject to the higher SDLT surcharge which is an extra 5% on top of the standard rates. This means that there is no amount which is tax free, and instead the first £125,000 portion of the property’s value is taxable at 5%. If you decided to buy a second home as an investment property for £450,000 the SDLT surcharge would be calculated as follows:

• The first £125,000 is charged at 5% which is £6,250
• The amount between £125,001 – £250,000 is charged at 7% which is £8,750
• The amount between £250,001 – £450,000 is charged at 10% which is £10,000
• Your total SDLT bill is therefore £35,000

Of course, not everyone who faces the SDLT surcharge are landlords buying investment properties. In fact, it is very easy to fall into the surcharge when you are buying your next home but have not yet sold your previous one. In this situation, you must still pay the SDLT surcharge when you buy your new house, however you are able to reclaim the difference between the surcharge and standard rate once you have sold your previous property. There is a time limit to this however, and in order to claim the stamp duty overpayment, you must sell your original home within 3 years of buying your new home. Exceptional circumstances may be considered but this does not include ordinary delays such as low interest in the market or potential buyers changing their mind. In addition to this time limit, there are other conditions. The new home you have bought must be intended to be your replacement main residence and you must also claim your rebate within 12 months after the date of the sale of your old home.

What tax do you have to pay when you sell a residential property in the UK?

As property is such a significant asset, the main tax it will attract when you come to sell it is Capital Gains Tax (CGT). CGT is a tax that is due whenever you dispose (sell, trade, or gift) of a qualifying asset that has increased in value since you first acquired it. Residential property is considered a qualifying asset when it comes to CGT but there are tax reliefs available under certain conditions which may either help you reduce your tax bill or make you eligible for exemption. We’ll explain and go into more detail about the available types of tax relief in the following sections below. 

In general, however, residential property that is not your main residence such as a buy-to-let property or furnished-holiday-let property is subject to CGT. This will be charged at between 18% – 24% tax depending on your personal income tax band. Basic rate income taxpayers are generally subject to 18% for their CGT but where the gain pushes them over the basic rate income threshold then the excess amount will be subject to 24%. Higher and additional rate income taxpayers will be subject to the 24% tax rate on the entirety of their gain.

Reporting capital gains and paying CGT on the sale of a property

For residential property specifically, there are stricter rules when it comes the CGT reporting. If you make a gain, then you must report this within 60 days of the completion date (not the contract exchange date). The tax must also be paid for by this date. You can do this directly with HMRC online, but you will need to either create an account or log into an existing account. If you are already registered for your self-assessment tax return, then you’ll also have to include details of your sale on your tax return by the 31^st January following the end of the tax year in which you made the disposal. You do not have to complete a 60-day CGT return if you did not make a gain, or the entire gain was covered by tax relief (and therefore no tax is due be paid).

However, where you make a loss on the sale of a property, it is advisable that you report this either voluntarily through the 60-day reporting portal online or through a self-assessment tax return. This way, you can use the loss to offset against future capital gains. Whilst this is not compulsory, failure to do this will result in being unable to use your loss to reduce any future capital gains tax bill. The loss does not expire and can be carried forwards indefinitely, but you must report the loss within 4 years of the end of the tax year in which the loss arose to be able to use it.

Private Residence Relief (PRR) when selling your main residence

Private Residence Relief or PRR is a valuable tax relief available to you when you sell your main residence. It exempts you from paying CGT on any gain made from the sale of your home, so long as you have lived in it as your primary residence for the entire period of ownership. In addition to this, PRR offers an additional grace period of 9 months if you happen to move out before finalising the sale of your home as this allows you time to complete your sale without penalising you with a tax liability.

If you haven’t lived in the property for the entire time you’ve owned it, you can still claim PRR – but only for the portion of time that it was your main residence. So, for example, say you owned your home for nine years, living in it as your main residence for eight years, and renting it out on Airbnb for the final year of ownership. You would qualify for PRR for the eight years you lived there, plus a further nine months under the automatic grace period given. This means that you’d only be exposed to CGT for the final three months of ownership.

Continuing with this example, let’s say the total gain you made on selling your property was £150,000. This would mean that you would fall into the higher-rate income tax bracket so your CGT would be charged at a rate of 24%. PRR would exempt 8.75 years out of the total 9 years which equates to 97.2% of the gain made. Therefore, only 2.8% of £150,000 (£4,200) is taxable. After applying your annual CGT allowance of £3,000, you’d only pay tax on the remaining £1,200, resulting in a CGT bill of £288. Although we have not considered it in this example, this could be reduced even further were you claim allowable expenses such as legal fees or estate agent costs.

In summary, PRR can dramatically reduce or even eliminate the CGT you’d attract when selling your home. For most people who have lived in their property as their main residence, it allows them to keep 100% of their profit rather than handing over any profit to the taxman.

Could you use Lettings Relief when you sell your home to reduce your CGT?

Lettings Relief is another form of tax relief that you could potentially use to reduce your CGT when selling your home. It was previously much more generous, allowing relief even if you had vacated your home and let it out entirely. However, current rules are more stringent and you’re only able to claim Lettings Relief if you lived in the property at the same time as your tenant (such as if you had rented out a spare room to a lodger).

Lettings Relief is worth up to £40,000 in tax relief per person (£80,000 if you are claiming as a couple) and applies to the period that your property was let out so long as you were also living in it. At this point you may be wondering why you would need to claim Lettings Relief if you would be fully eligible for PRR, but where you have let out a part of your property that is exclusively for your tenant (such as a separate annex with their own kitchen and bathroom), then this could attract CGT because it was not used as part of your main residence. This is where Lettings Relief becomes useful.

To illustrate in more detail, let’s say you owned a property for 10 years which you lived in and rented out a spare room to a lodger for 2 years during that same period. When you come to sell it, you make a gain of £120,000. Whilst it was your main residence for the full duration of the 10 years of ownership and you would therefore be entitled to PRR, HMRC also determines that 10% of the property’s value is subject to CGT because of the room exclusively rented out to your tenant for the 2 years. 10% of your gain is therefore £12,000, but claiming Lettings Relief is worth £40,000 so would eliminate your entire CGT exposure leaving zero tax liability to pay.

So, whilst Lettings Relief may not be as widely available in as many situations as it once was before, it can still be highly valuable where you have let out part of your property but have also been using it as your primary residence.

Get help with property taxes

Navigating taxes when handling such substantial assets requires experts in the field to ensure you get to keep as much of your profits as possible. This is where our team can help. Use our online form to get in touch and see how we can make handling your CGT stress-free and efficient.