The process of selling a plot of land can be long and challenging for many reasons. There are the extensive legal procedures that are required anytime you are selling a property. Looking for a buyer, even if you have a real estate agent, can be mentally and emotionally draining. On top of all that, anytime there are large sums of money at stake or to be moved around, your stress levels can go through the roof.
If you have sold a plot of land, there is often an understandable desire to know if there are any parts of that process that you can claim against your income tax to recoup some of the expense. Transfers of land titles, sale of property and anything that falls under the realm of real estate can have a maze of potential taxes and credits that may or may not apply so it helps to get a bird’s eye of the whole picture to know what applies to your situation.
What Am I Responsible for After I Sell a Plot of Land?
Selling a plot of land is an intricate process that involves many parties including real estate professionals, lawyers, bankers and more. Once the sale of your plot of land is complete, there are a few actions that must be taken right away to ensure there are no penalties levied against you.
- Pay any Legal or Bank Fees
Lawyers and bank fees are an inevitable part of the process when you are dealing with the sale of a property. Legally transferring titles from person to person and working out the details of the transfer of large sums of cash means that professionals are, understandably, involved in the process. Make sure that these are paid as soon as possible.
- Pay Any Capital Gains Tax within 30 Days
When you sell a property, you may or may not have to pay capital gains tax. This entirely depends on whether you have created a financial “gain” from the time you bought the property and then sold it. If you owe capital gains tax, it must be paid to HMRC within 30 days of the sale. If you are late in paying your capital gains tax, there may be fees and penalties imposed by the government.
What Are Capital Gains?
Capital gains are the profits received when you sell an asset that has increased in value. The difference between the original purchase price and the sale price is the “capital gains”. Capital gains tax is paid on the difference, not the entirety of the purchase price.
Is There a Difference Between Short- and Long-Term Capital Gains?
Short- and long-term capital gains are taxed differently because of the assumption that short-term capital gains are a form of active income and long-term capital gains are the natural by-product of appreciation and inflation.
- Short-term capital gains for property in the UK are applicable to properties that are owned for less than 24 months.
- Long-term capital gains tax will be charged on any property that is sold if you have held it for more than 24 months.
The rate at which you are taxed depends upon whether you are considered short- or long-term capital gain. The total amount of capital gains is also a crucial factor. For those looking to reduce the amount of capital gains that are taxable, there are many deductions that are eligible, such as the cost of improvement to the asset, as well as the cost of procuring said assets.
Are There Other Taxes I Should Be Concerned About?
The only other tax that may be of concern if you are selling a plot of land is the tax they impose on the profits you make from the sale of that property. There are instances when a property has been sold and the tax on the profits is not charged at capital gains rates, but at income tax rates.
The difference in capital gains and income tax rates can be substantial, but this is only done if you are selling properties to make a profit as a form of active income or if the government believes you are. For the average person who is selling a plot of land, this will not be a problem but for those who are buying properties and selling them to make a profit, it would be worth talking to a tax professional.
What Credits or Deductions are Available?
Now that we understand the landscape that surrounds the sale of a plot of land and the taxes you may owe, are there any reliefs or credits available to you if you have sold a plot of land?
Several avenues may provide some relief when it comes time to do your taxes. What are these credits and deductions?
Capital Gains Exemption
Every UK citizen has a yearly capital gains exemption of £12,300. That means if you have a capital gain of £45,000 on the sale of your plot of land, you can deduct £12,300 from that total. That reduces the sum that you will be required to pay capital gains from £45,000 to £32,700.
Expenses Incurred During the Sale or Improvement of the Property
Expenses incurred during the sale of your property are also allowed to be deducted at the time of your tax filing. If you have done serious improvements to the property or plot, you may also deduct these costs from your gains. Estate agents and solicitor fees are deductible but to get a list of all of the eligible expenses for improvements, it is important to check with your tax professional or reach out to HMRC to get clarification.
If you have incurred a loss and have sold the property for less than you originally purchased it for, you can register this loss when you file your taxes. There are many regulations and stipulations around this particular rule and you are barred from registering a loss if you sell a property to certain people you are connected with. This is another area where it would be prudent to double-check with a property tax professional to ensure that you are complying with the regulations and are eligible for the deductions.