Capital Gains Tax (CGT) is a tax on the profit made when you sell (or ‘dispose of’) an asset that has increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. For owners of second homes in the UK, understanding the implications of CGT is crucial, as it can significantly affect the financial outcome of selling a secondary property. This comprehensive guide will explore the details of how CGT applies to second homes, the allowances and reliefs available, and strategies to legally minimise this tax.
What is Capital Gains Tax?
CGT is charged on the profit (or gain) you make when selling property, shares, business assets, or other valuable items. The rate of tax varies based on the asset type and your income level. For residential properties, this includes any second homes or holiday homes you might own that are not your primary residence.
CGT on Second Homes
When it comes to second homes, CGT is particularly important because these properties are not covered by Private Residence Relief, which typically applies to your main home. Here’s how CGT is calculated and applied to second homes:
- Calculation of Gain: The gain is the difference between what you paid for the property and what you sold it for, taking into account any costs of buying, selling, and improving the property (but not maintenance costs).
- Tax Rates for 2024: As of the tax year 2024-2025, the CGT rates for residential property are 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers. The rate you pay depends on your total taxable income and the size of the gain.
Allowances and Exemptions
Every individual in the UK has an annual CGT allowance, known as the Annual Exempt Amount. For the 2024-2025 tax year, this is £3,000. This means the first £3,000 of your total gains in one year are tax-free. Couples who jointly own assets can combine this allowance, potentially doubling the exempt amount to £6,000 for joint assets.
Reliefs that Reduce CGT on Second Homes
Several reliefs may reduce the CGT bill on a second home:
- Lettings Relief: This relief can significantly reduce the CGT on a property that has been let out and was at some point your main home, up to £40,000 per individual or £80,000 for a couple, provided you shared occupancy with the tenant.
- Private Residence Relief: If the second home was at some point your main residence, you might be entitled to relief for the period it was your primary residence, plus an additional 9 months after moving out.
Reporting and Paying CGT
CGT must be reported and paid to HM Revenue and Customs (HMRC). From April 2020, if you’re a UK resident and sell a residential property in the UK, you’ll have 30 days from the sale date to report and pay any CGT owed. Failure to do this can result in penalties and interest.
Planning and Minimising CGT on Second Homes
To reduce the CGT on second homes, consider the following strategies:
- Timing of Sale: Time the sale of your second home when your income is lower to fall within a lower tax bracket, reducing the CGT rate.
- Spouse Transfers: Transferring a portion of the property to a spouse in a lower tax bracket before selling can reduce the overall CGT liability, as each spouse uses their CGT allowance and potentially lower tax rate.
- Keep Records of Enhancements: Keep receipts for any improvements made to the property, as these can be deducted from the gain.
Professional Advice
Given the complexities of CGT, especially with recent changes affecting second homes, obtaining professional advice can be highly beneficial. An expert can help navigate the rules, plan for tax-efficient disposals, and ensure compliance with all reporting requirements.
Capital Gains Tax on second homes can be a significant financial consideration. Effective planning and understanding of the tax rules are essential for minimising the impact of CGT on the profits from selling a second property. At Double Point, we specialise in providing tailored advice that helps our clients manage their CGT liabilities effectively. Whether you’re considering selling your second home or need assistance with tax planning, our experts are here to help. We offer free consultations to discuss your specific needs and ensure you’re positioned to make the most informed decisions regarding your property investments.
