Capital Gains Tax – Selling a Second Property
Capital Gains Tax, also known as CGT, is the tax you pay when you sell an asset (for example, a property) which is worth more than it was at the time you purchased it. You only pay tax on the margin of profit, rather than the total amount that you sell the asset for.
In the UK, you’ll pay a higher rate of CGT on property than on any other asset, but your income will have a bearing on the amount of Capital Gains Tax you’ll need to pay. For example, if you’re paying CGT on a residential property, basic-rate taxpayers will pay 18%, while higher and additional-rate taxpayers will pay 28%.
Capital Gains Tax on Your Second Home
If you own more than one property, you will have to pay Capital Gains Tax when you sell your secondary home. So, whether you’ve inherited a property from a family member, own a holiday home or you’re building property portfolio, it’s worth calculating exactly how much CGT you’re likely to pay.
As you don’t have to pay tax on your main home, you can nominate which property you’d like to be tax-free. It doesn’t have to be the house which you spend the most time in – if you’re looking to reduce the CGT you pay, it’s sensible to choose the property which is likely to increase in value the most. This way, you can avoid paying CGT on a larger profit margin, and pay it on whichever property which incurs the lowest charge instead.
When else might I need to pay Capital Gains Tax?
It’s not usually necessary to pay CGT on your house, presuming that it’s your only property. However, there are some exceptions to this rule, so if your house meets any of the following conditions, you may have to pay Capital Gains Tax:
- Your home includes 5,000 square metres of land, or more
- Your home incorporates multiple buildings
- You bought it to make a monetary gain, as a property developer would
- You’ve sub-let it (a lodge in one room does not count)
- Part of it is exclusively used for business purposes
- You moved out of it to live elsewhere over 1.5 years ago, but still own it
- You sold part of your garden, and your total plot exceeds half a hectare
Capital Gains Tax Allowance
As well as this, you’ll only need to pay CGT on any monetary gains which exceed your Capital Gains Tax allowance. In the UK at present, the CGT allowance is £12,000 per person – so if the increase in value is less than this, then you won’t have to pay CGT.
If the increase in value does exceed £12,000, then you’ll still only pay Capital Gains Tax on the portion of the increase which is greater than this allowance.
Calculating Your Capital Gains Tax
There are a few steps you can take to accurately calculate your Capital Gains Tax. The below process should give you a good idea of how much you’re liable to pay:
- You need to deduct the original value of the property from the new sale price – this figure is your total gains.
- After this, you can subtract any costs you incurred during the selling process, including Stamp Duty and estate agent fees from that figure.
- You can also deduct the cost of any significant improvements or developments you made to the property during the time you lived there from this figure.
Capital Gains Tax is then payable on this remaining amount, presuming it’s over £12,000.
Reducing Your Capital Gains Tax
There are several ways you can legitimately reduce the amount of Capital Gains Tax you pay when you sell a second property. Here are some things to bear in mind:
- Make the most of your allowance. As mentioned earlier, everyone is entitled annually to £12,000 which is exempt from tax. While you can’t carry this over into the following year, you can combine your CGT allowance with a spouse, so if you co-own a property you could potentially get £24,000 tax-free.
- Transfer ownership of your property. If you’re in a higher tax bracket, you might consider transferring the property into the name of a loved one who pays the standard rate of income tax, as for them, CGT is charged at 18%, rather than 28%.
- Offset your losses. You can level any capital losses you’ve made that year against your capital gains, to reduce the amount of Capital Gains Tax you pay. For example, if another asset you own has decreased in value, you can subtract this figure from your total gains.
- Time it well. If you’ve already used up your CGT allowance for the year, consider putting off the sale until the following year begins, so your CGT allowance renews.
Other UK Taxes on Second Homes
Capital Gains Tax isn’t the only tax you’ll need to pay when you’re buying or selling a property in the UK. You’ll also need to consider the below:
When you purchase a property worth over £125,000 in the UK, or a second property over £40,000, you’ll be required to pay Stamp Duty. This tax varies based on where in the UK you live, whether your property is residential or non-residential, mixed-use, and whether you’re a first-time buyer. Stamp Duty on second homes is paid at a rate 3% higher than principal homes, since legislation came into place in April 2016.
Stamp Duty is payable on both freehold and leasehold properties, and you still need to pay it if you buy a home through a shared ownership scheme.
Your local council will often provide you with a discount on the council tax when it comes to your second home, but this is entirely at their discretion.
If your property is unfurnished for the first six months, you won’t need to pay council tax, and you can also be exempt from paying it if you’re carrying out significant redevelopments on the property.
Despite these discounts, it’s worth noting that if your second property is vacant for over six months, the council might increase your council tax. If it remains uninhabited for two years or more, they charge as much as 50% more than your standard rate of council tax.
When you own a second property and you let some or all of it out, whether for business or residential purposes, you’re legally obliged to pay income tax on the proceeds.
Make sure you deduct any costs incurred from letting out the property from your income, before you pay tax on it. That means you can subtract fees for any maintenance or repairs and utility bills from your income, to reduce the amount of income tax you pay.
Capital Gains Tax is the tax you pay when you sell your property for a greater value than you bought it for. While your principal property is exempt from CGT, it’s nearly always payable on a second property – depending on your income tax, you’ll either pay 18% or 28% CGT.
Everyone is entitled to an annual CGT allowance of £12,000, which is tax-free, so if your capital gains don’t exceed this, you won’t need to pay CGT.