What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax that you will pay on any profit that you make when you sell an asset which increases in value. If you own a second property, then you would need to pay CGT on any profits that you earn from it. It is important to note that this is based on the gains that you make rather than the full amount of money that you receive.

There are reliefs from CGT for those selling their primary home and typically, these make sure that there is no tax to pay. Issues come up when a property being sold is not a principal private residence, or it was, but only for a short period. Second homes and property investments will not have any primary residence reliefs.

What does it mean to ‘dispose of’ an asset or property?

To dispose of an asset means more than just selling it. It could mean gifting or transferring it to someone, swapping it for a different asset, or receiving compensation because of the damage or loss of the asset.

How much is Capital Gains Tax on second homes?

When it comes to paying CGT on your property, then you will pay a higher rate on your gains than you would with other assets. If you are a basic rate taxpayer, then you will need to pay 18% of any gain that you make on selling a second property. If you are a higher, or an additional rate taxpayer, then this will be charged at 28%.

The difference in CGT between property and other assets is quite high. With other assets, the basic rate of CGT is 10%, and the higher rate will be 20%.

CGT is included when working out your tax liability. A result of this may be that other income could push you into the higher tax bracket.

All taxpayers have a CGT allowance annually which means that you can make tax free gains up to a certain amount. The amount is currently £12,000. Couples that own assets jointly can combine this allowance which means that they could avoid CGT on gains of up to £24,000. You cannot carry over any unused allowance.

Reduce Capital Gains Tax on a Property Sale

There are a few situations where it is possible to avoid paying CGT on a property sale. This is the care when a resident sells their home if the house is the primary residence and is the only home that the resident has. This needs to be the case for the entire time that the resident has owned the house. In addition to this, no part of the property should have ever been let out to anyone else, although this does not apply if there has been a single lodger living in the property. Part of the home should never have been used for their business.

In addition to these rules, the property must be less than 5,000 square meters. This not only includes the property itself, but also any other buildings on the grounds themselves. People that own land attached to their property could find themselves having to pay CGT, unless they sell the land separately to the home.

Finally, the homeowners will need to show that they didn’t just buy the home to make a gain. If this has been your primary residence for several years, this shouldn’t be an issue. However, this could be a problem for people who flip properties. If you have bought a home to restore it and sell it, then you will need to pay CGT when you sell it.

If you meet any of these criteria, you don’t have to do anything. You’ll automatically get a tax break which is called the Private Residence Relief.

Reduce Capital Gains Tax on Inherited Property

When you inherit a property, CGT comes into play again. Often, the person inheriting a property doesn’t want to keep it. If they decide to sell the property straight away, they may not have to pay CGT.

The estate of the deceased doesn’t have to pay CGT on any of the property or assets that are not sold before they passed away. If, however, the value of the property increases after the person dies, then the person inheriting it will need to CGT when it is sold during probate.

CGT is not on the final sale price less the initial buying price, rather the government will estimate the CGT based on how much the value of the home will increase after someone has died. When someone inherits property, they will do so at probate value. You will only be liable to pay any CGT when there is an increase on this value.

If you know that you don’t want to keep an inherited property, then you should sell it while still in probate. There will only likely be a minimal increase in value, if any. This is the best way to avoid CGT.

Reduce Capital Gains Tax on Foreign Property

If you are looking to reduce CGT on foreign property, as long as the UK resident states that the foreign property is their primary residence. You’ll need to declare to the UK government that the foreign property is your principal residence. You’ll need to declare this within two years of buying the property.

Transferring a residential property investment to a limited company

As a landlord, you may wish to transfer your investment property into a limited company. You may want to do this to offset your mortgage interest. There are some considerations that you need to make before doing this.

You will need to factor any stamp duty on the translation in addition to CGT. You will also need to pay CGT if you transfer a property into a limited company. Moving a property to a limited company can be a costly endeavour.

Speak to a property accountant

If you need help with your capital gains tax, you should get in touch. Click here or call us to discuss how we can help you.