Tax on sale of second properties – what you need to know
If you are considering selling your second home or buy-to-let property, you will need to pay capital gains tax (CGT) on the profits you make. New rules which came into force from 6 April 2020 reduced the available tax reliefs and significantly reduced the time you have to pay your CGT.
What is Capital Gains Tax?
CGT is payable on any gain made when you sell a property that is not your main home. Your gain is the difference between what you paid for the property of the value when you inherited if applicable and the amount you later sell it for.
You are also liable to CGT if you dispose of a property in other ways, such as gifting or transferring it to someone else who is not your spouse or exchanging it for another asset. In this instance, you will use the property’s market value in place of the sale price.
You will have to pay CGT if you are selling a house or flat that you bought as a second property, such as a holiday home. You will also be liable to pay capital gains tax on any buy-to-let property, even if it is the only property you own. If you have lived in it as your main residence for any period, the position is further complicated and there will need to be a detailed calculation to work out your gain.
If you have more than one property, you can nominate one to be your main residence. You have two years from when you get a new home to nominate it as your main residence.
Capital Gains Tax Allowance
UK domiciled individuals or those not claiming the remittance basis of taxation have an annual capital gains tax allowance. For 2020/21 and 2021/22 the allowance is £12,300. Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,600. This cannot be carried forward.
Capital Gains Tax Rates
You pay higher rates of capital gains tax on a property than on other types of assets. Basic-rate taxpayers currently pay 18% on any gains they make when selling property. Higher and additional-rate taxpayers currently pay 28%. Depending on the amount of gain you make, even if you are a basic rate taxpayer, the gain could be partly taxed at the higher rate.
Calculating the gain
The gain is calculated by taking the sales proceeds, net of any costs of sale such as agents fees, and deducting the original cost of the property, plus any costs you incurred when you purchased it such as stamp duty. You can also deduct the cost of substantial capital works such as a new kitchen.
To calculate how much CGT you will need to pay, deduct your annual CGT allowance from your gains, net of any other losses you may have. This is the taxable gain.
You need to report the gain to HMRC on a CGT return and pay the tax within 30 days of completion. Failure to pay within 30 days will result in penalties and interest charges.
The tax due is an estimated amount at the time of the gain and could change based on the final position. The amount paid is treated as a payment on account and processed on the individual’s self-assessment tax return.
You will need to submit a CGT return online via the HMRC’s government gateway. LK & Associates can prepare and submit these forms on your behalf.
Even if you no longer live in the UK, you are liable to CGT on the sale of a UK residential property. You can re-base the property’s value on 6 April 2015, the date the rules came into effect. However, if it was previously your main residence, it might be better to work out the gain on a pro-rata basis. In fact, there are three different methods for working out the gain and you can pick the most beneficial.
How we can help
If you are selling a buy to let property or your second home and would like some advice relating to capital gains or would like us to quantify your potential CGT liability, please contact us. Our tax team is highly experienced in this area and can guide you through this complex process.