June 22, 2021
As a landlord, managing your tax liability is maybe something that’s always at the back of your mind. And capital gains tax (GCT) is a huge part of that.
The recent news that capital gains tax in Scotland would not be increased came as a relief to many landlords, as upping CGT to up to 40% for higher rate taxpayers could have prompted a dramatic reduction in rental properties, due to many selling up.
Whether you own one property, or over 20, capital gains tax is something you always have to think about when it comes to managing the size of your tax bill – or at least your accountant will.
But if you’re fairly new to capital gains tax in Scotland, this guide will explain more about how it works, and some of the main things you should bear in mind – especially if you’re thinking about selling your tenanted property or portfolio.
An introduction to capital gains tax in Scotland
Anyone selling property in Scotland must pay capital gains tax on the profits they make – however, usually this tax won’t apply when selling your main home (only when selling buy-to-lets or additional homes).
NOTE: The exception to this is when you’ve been using your home partly as a business premises, or part of your property has been leased out.
It should be noted that any capital gains must be included when working out your tax status for the year, and CGT may push you into a higher tax bracket. However, all UK taxpayers have an annual CGT allowance, which in 2020/2021 is up to £12,300.
For couples who own joint assets, this allowance can be combined to £24,600.
How is capital gains tax in Scotland calculated?
Capital gains tax in Scotland is calculated on the UK thresholds, rather than using the Scottish income tax bands – which means if you’re a higher-rate taxpayer, you’ll still pay the basic rate on capital gains.
For basic rate taxpayers in the UK (and therefore in Scotland), the CGT rate is 18% of the gains made when selling property, whereas for higher rate and additional-rate taxpayers it’s 28%.
You can expect to pay a higher rate of CGT on property compared to if you were selling other assets (at the basic rate of 10% and 20% respectively).
If you’re new to calculating capital gains tax, I’d recommend seeking professional advice from your accountant, especially if it looks like a capital gain may move your income into a higher tax bracket.
However, to provide you with a quick example of how CGT can be calculated in practice:
TIP: Check out this handy capital gains tax calculator from Tax Scouts. There’s also this free guide from Which.co.uk.
Advice from the property pros
As a rule of thumb, the longer you hold onto a property, the higher your capital gains tax will be once you sell it.
TIP: If, however, you buy as a limited company and sell the property in the future, you would not have to pay capital gains tax. Instead, the company would have to pay corporate tax on the profit – which can work out well.
We remember a friend of ours who had recently sold a property in Marchmont she’d owned since 1982, and the capital gains tax to pay was absolutely bonkers! I’m also not looking forward to having to pay capital gains when it comes to selling my own property – it’s something I’ll have a wee think about.
The news about capital gains tax in Scotland was a relief for one client who had been in the middle of the conveyancing process when selling her tenanted property portfolio with us. Conveyancing is generally taking longer at the moment (due to Covid), and portfolios, even more so.
As we got closer to the end of the sale, she had been keeping an eye on the budget, as the changes we’re talking about could mean the difference of an extra £10k or £20k or £40k in some cases.
When we look at that in terms of why someone is selling (say for retirement, or a big life change) that could really affect their plans and what’s going to be possible for them. In that regard, it’s always good to have an accountant who can advise you and help you prepare for CGT.
In summary…
I know capital gains tax isn’t the most fun subject, but it’s an important one. Many of our clients who are thinking about selling have to calculate their capital gains and plan for the fact they may have to pay an extra £20k, £30k or £40k to the tax man.
If you’re unsure of your current situation, or need financial advice, I’d recommend speaking to your accountant who can take a look at things and help guide you in the right direction, for that extra reassurance.
If you’d like to learn more about selling tenanted property #ThePortolioWay, feel free to get in touch with us – we’re always happy to help. Or, simply leave a question in the comments below!
Written by Chris Wood, MD & Founder of Portolio
Get in touch on 07812 164 842 or email [email protected]
Other blogs you might be interested in:
- Scottish Property Investors: What Finance Options Are Available Right Now?
- Scottish Property Investment in 2021: Predictions from 13 of the Top Property Experts
- The Final Stage of Section 24 and What it Means for Landlords
- Should You Buy to Let as a Limited Company? [Pros and Cons]
- Should You Invest In Property During COVID-19?
Hi we are selling our deceased mothers house we think maybe get around £85000. This will be split 5 ways. What if any tax do we have to pay ?
Hi Maureen, thanks for your question. Capital gains tax is payable on any sale amount that you make above the value of the property when you inherited it. This would be after allowable deductions have been taken into account. This includes any fees that you had to pay when you inherited the property, for example, solicitor fees, estate agents fees and surveying fees etc. This might be helpful: https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/
I owe CGT on a recently sold property in England but am now a Scottish resident for tax purposes. I am a basic rate tax payer so what rate will I pay and in which tax jurisdiction?
Hi Kathryn, thanks for your comment. The rules for calculating Capital Gains Tax are the same across the UK. This link will provide further details: https://www.gov.uk/tax-sell-property/work-out-your-gain. I hope this helps, Ross.
I'm an executor of a will. If a property achieves more than the submitted amount to the tax office via surveyors report. Is The extra amount added to the estate and taxed at IHT or capital gains tax
Hi Dale, Thanks for your query. It would be the final sale price achieved which would be the starting point for the Capital Gains Tax calculation. You should probably seek advice from a tax expert as CGT can be complex. You might find this helpful: https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/disposal-date
Hi, I am selling a buy to let property, which was purchased in my name only, but was part funded by my husband. Can we use both our capital gains tax annual allowances when calculating the amount of tax that we have to pay?
Hi Marilyn, thanks for your comment. You can only combine your tax-free allowances if you jointly own the property. If you solely owned the property then you could consider adding your husband to the title allowing you to reduce your CGT liability when you come to sell. However, please note this is best done at least 6 months before you hope to complete the sale if the prospective buyer requires lending. More details can be found here: https://www.gov.uk/capital-gains-tax I hope this helps. Ross
Hi Ross & Team,
My brother and I have a property we're ready to sell, which will certainly have a CGT liability, with an increase in value of about £300K . He is keen to wait until the next tax year before selling, as he has already used his CGT allowance this year (and as he's just retired, he'll be a basic rate tax payer) - but we are worried that Scotgov may significantly increase the CGT rate in the next budget.
I understand that you don't have a crystal ball...but do you and your colleagues have similar concerns or a gut feeling about where the CGT rates may go in the next few months?
My concern is that in trying to gain next tax year's CGT allowance, it may end up costing us a LOT more if we find Scotgov puts the CGT rate up by 10-40%
Cheers, Jimmy.
Hi Jimmy, thanks for your question. The rules for calculating capital gains tax – and also inheritance tax – are the same right across the UK. So, the rate of CGT paid by a Scottish taxpayer depends on the UK tax bands and not the Scottish tax bands. You are allowed to offset legitimate costs and expenses against your tax liability. I would suggest you speak to an accountant or tax expert to help you calculate these legitimate costs. Thanks, Ross.
Hi, I have a small flat that I purchased years ago at auction, and would like to gift this to my son, will I still be liable for CGT even if I give this property to him ?
Hi Kenny, the answer is yes. The market value of the property at the time the property is gifted will be used to calculate the capital gain. The CGT is calculated as the increase in value arising between the date of purchase and the date of disposal, less any capital improvement costs, and any associated costs of purchase or gift etc. Please note, "improvement costs" can't be redecoration or a like-for-like kitchen. This is really for significant improvements like an extension. Further info can be found here: https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax Remember, its always worth seeking professional advice from a tax expert when dealing with CGT.
Hi, I jointly own a maisonette with my wife which is considered to be a single property but retains separate title deeds for each floor, as it was previously split several decades ago but we restored it to its original maisonette features about 14 years ago. We’re looking to sell and considering splitting it back into 2 properties as we don’t think as a single property it’s true value will be reflected. We would need to install a kitchen on one floor, new windows and replace the bathrooms. Would any of this be taken into account for capital gains tax purposes, and also would the costs of the conversion work we did 14 years ago also be? Thanks.
Hi John, thanks for getting in touch. I'm not sure how the CGT will be calculated if the purchase price can't be identified. Perhaps you would need a surveyor to provide an assessment of the likely purchase price 14 years ago. Best to get help from a tax expert to get a definitive answer. The Government's website might provide some helpful guidance: https://www.gov.uk/tax-sell-property
Thanks for getting back to me and I’ll follow up that advice. Much appreciated!
Dear Sir
Dear
i am selling my main home that i have owned for more than 20 years. Normally i should not pay CGT over this sale. But i have
a little worried of this for the reason below. A few years ago, i bought a buy to let flat with other two friends and three of us jointly own this flat . However the tax officer asked us to form a partnership in order to report the rental incomes for this investment flat
and so we formed a partnership with registered at the address of my main home as above i am selling. Do i need to pay CGT
for the sale of my main home for this reason?
Could you give some advice over this?
Many thanks with kind regards
Jenny
Hi Jenny, thanks for getting in touch. You do not pay Capital Gains Tax when you sell your main home which you have lived in for all the time you've owned it. However, its always best to seek professional advice if you are unsure. You might find this link helpful: https://www.gov.uk/tax-sell-home#:~:text=You%20do%20not%20pay%20Capital,not%20include%20having%20a%20lodger
Hi.
I am considering selling a property I have let out for approximately ten years now. The property has been valued at £120000, I paid £77000 for this at date of purchase. I am a higher rate tax payer. Could you give me an idea of how much capital gains tax i would need to pay on thus sale.
Thanks.
Andy.
Hi Andrew, thanks for getting in touch with your query. To calculate the gain, you use the amount you originally paid for the property and deduct that from what you sell the property for. So in your case, the gain is £43,000 based on the valuation – that is £120,000 minus £77,000. Currently, the tax-free CGT allowance is £12,300. However, the capital gains allowance will be changing to just £6,000 come the 2023/24 tax year. So, you'll be taxed (28%) on £30,700 (43,000 - 12,300).
It's also possible to offset some costs, such as LBTT/stamp duty and conveyancing when you bought the property and any charges associated with selling it (including estate agent fees). You should also be able to offset any capital improvements you've made to the property against your CGT bill. More info can be found here: https://www.gov.uk/capital-gains-tax Its always worth speaking to your accountant or financial advisor before doing your CGT calculations.
Hello,
I built a house in 2003 cost approx 200k it will sell next month for 334k, during this time my in laws lived in it rent free whilst I paid a 160k mortgage on it interest only. Can I offset the interest payments against any gain? if not how do I calculate the bill? Thanks.
Hi Gary, I would suggest seeking advice from an accountant or tax advisor for this query. Sorry we couldn't be more helpful.
Hi. I have a property in Scotland that I have been letting out for 6 years and I have just put it up for sale. I earn around £70,000 as an agency worker (ie under an umbrella company). Will I need to pay CGT once the property has sold and if so how much?
Hi Melanie, thanks for getting in touch with us. You’re not taxed on the sales price, just the gain i.e. the difference between your buying and selling prices. You should also apply for any allowances or reliefs. Here is some helpful additional info: https://www.gov.uk/capital-gains-tax/rates
On divorce, we are selling our house for £300,000…….and we are both buying a flat each at £100,000 each……will CGT be payable on the surplus £100,000
Hi Gordon, thanks for getting in touch. You do not have to pay capital gains tax (CGT) on any profit if it has been your only or main home throughout the entire period of ownership. I hope this helps, more info can be found here: https://www.gov.uk/tax-sell-property. Ross
Dear Portolio,
I'm currently in the process of selling a plot of land (no builings) in Skye that I jointly 50/50% own with my wife. This is not our main residence. We are both higher rate tax payers. Could you please advise what CGT rate we will need to pay?
Many thanks in advance!
Hi Jon, thanks for getting in touch with your CGT query. You may have to pay Capital Gains Tax if you make a profit when you sell the land. This link provides further assistance: https://www.gov.uk/government/publications/land-and-leases-the-valuation-of-land-and-capital-gains-tax-hs292-self-assessment-helpsheet/hs292-capital-gains-tax-land-and-leases-2023#valuations-of-land Thanks, Ross