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.
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.
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.