Capital gains tax advice for landlord and property investors

What is Capital Gains Tax?

Capital Gains Tax, or CGT, is a tax levied on the profit you make when selling an asset that has increased in value. Second homes fall into the category of relevant assets, therefore CGT is liable on the sale of second homes. You are taxed on the gain that is made, rather than on the total selling price of the property.

If you are selling your primary private residence, there are specific reliefs from Capital Gains Tax available, which usually means that there is no tax to pay.

If the property that is being sold is not the primary private residence or was only your primary private residence for part of the time you owned it, CGT may arise. There is no primary private residence relief when selling your second home, or property that is owned as an investment.

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

The disposal of an asset refers not just to selling it, but to other types of relinquishing the property, such as gifting it or transferring it to somebody else, exchanging it for another asset, or receiving compensation if the asset has been damaged. This means if you gift a second property to a family member, perhaps in advance of an expected inheritance, the asset will have been disposed of, and CGT may be liable.

How much is Capital Gains Tax on second homes?

The rate of CGT payable depends on your income tax band; CGT is also higher on the sale of property than on other assets, such as artwork. If you are in the basic rate tax band, you will pay 18% on the gain made on selling a second property. If you are in the higher or additional rate tax bands, the percentage you pay increases to 28%.

For non-property assets, the basic rate of CGT is 10%, and the higher or additional rate is 20%.

Every taxpayer has an annual allowance for Capital Gains Tax, which means that you can have a gain up to a certain amount tax free. For the tax year 2019/20 the allowance was £12,000 per individual; if you jointly own your assets with your partner, you can combine your annual allowance, therefore avoiding CGT up to £24,000.

This annual allowance cannot be carried forward or backwards to retrospective tax years, so you either use it or lose it. It is important to remember that any gains you make on the disposal of assets are included in the calculation of your tax liability, therefore any additional income could push you into a higher tax bracket. Book a meeting with our expert advisors today to determine if you are at risk of impacting your tax bracket.

Reduce Capital Gains Tax on a Property Sale

There are several scenarios in which it is possible to avoid paying Capital Gains Tax on the sale of the property. The main scenario is when the owner is selling their home. There are several criteria that must be met in order to avoid CGT when selling your principle private residence. Firstly, the house has to be the primary residence of the owner and be the only home that the resident has. The house that is being sold should also have served as the primary home for the whole time that the seller has owned it, without parts of it being let out to others, although having a single lodger in the home is allowable. Additionally, the owner must not have used part of the house for their business, which could limit the relief, available for sole traders or self-employed people working out of their own home. Furthermore, the entire property must consist of less than 5,000 square metres, otherwise CGT may be levied on it.

Finally, the owner of the home must demonstrate that they didn’t purchase the property purely to make a gain, which could be problematic if the owner hasn’t lived in it for several years, declaring it as their primary residence, or if the house was bought as a quick fixer-upper in order to turn around a profit within a short period of time.

If all the above criteria are met, the government will automatically provide the homeowners with a tax break known as Private Residence Relief. However, if not all the above criteria are met it may be difficult to avoid CGT at the end of the tax year. Talk to one of our expert advisors before selling your property to determine if you are at risk.

Reducing Capital Gains Tax on Inherited Property

If an individual inherits property and does not want to keep it and therefore sells it immediately, that individual may not be liable for CGT. The death estate of the deceased does not have to pay Capital Gains Tax on any property that has not been sold before they died. These are considered ‘unrealised gains’, and therefore inheritors do not need to pay CGT. However, if the property value increases after the person has died, then the individual who inherits the property will need to pay CGT upon sale during the probate process.

Reducing Capital Gains Tax on Foreign Property

As the UK does not require CGT to be paid on an individual’s primary residence, it is possible to avoid paying capital gains tax on foreign property if the owner declares it as their primary residence. Usually, the owner must declare this to the UK government within two years of purchasing the foreign property. This could become problematic if the owner sells foreign property and UK property in the same year.

Transferring a Residential Property Investment to a Limited Company

If a landlord wishes to transfer an investment property to a limited company, this will be deemed a land transaction, and therefore Stamp Duty Land Tax will be chargeable; as it is likely not the primary private residence of the owner, an additional 3% SDLT charge will also be payable. Transferring the investment to the limited company will also give rise to CGT, and your personal mortgage will not be transferrable to a limited company. All of this means that transferring a property to a limited company can be a costly exercise.

Letting Relief

As of April 2020 Letting Relief is not available on second homes, as only those homeowners who let our part of their main residence while they still live there will qualify for Letting Relief upon the sale of the property.

Speak to a property accountant

Capital Gains Tax on the sale of a second property is a highly specialised area, which interacts with multiple different tax types as well. Book an appointment with one of our expert advisors today to discuss how it can impact your finances.