Capital Gains Tax (CGT) is paid to HMRC on the sale of an asset that has made a profit. So, if you have a second home that you are looking to sell, how can you avoid CGT?
Well, in truth you can’t avoid paying CGT if the property has increased in value. But with expert help, you may be able to lower your final CGT bill. So, how much will you need to pay, what can be deducted and how is it paid?
How much Capital Gains Tax will I pay?
Currently, CGT on property is set at 18% for basic rate taxpayers and 28% for higher rate taxpayers. This is higher than the 10% and 20% rates for other assets, such as paintings, for example.
If you bought your second home for £100,000 and you sold it for £300,000, you would owe CGT on the £200,000 profit made. Not on the £300,000 sale price. But you may be able to reduce the amount you pay with the tax allowances we’ve set out below.
Tax allowances for Capital Gains Tax
For the 2023-24 tax year, you can make tax-free capital gains of up to £6,000. So, if the property hasn’t made more profit than that, you won’t owe HMRC any CGT. It’s worth noting, that couples who jointly own assets can combine this allowance, meaning there could be a gain of £12,000.
If you paid stamp duty when you bought the property, that can be deducted, as well as solicitors and estate agent fees for buying and selling the property. For example, £5,000 stamp duty and £5,000 solicitor and estate agent fees, means £10,000 exempt from CGT.
Bought second home for £100,000
Sold for £300,000
CGT is owed on the £200,000 profit.
- Stamp duty was £5,000
- Solicitor and estate agent fees were £5,000
- CGT annual allowance £6,000 (2023/24)
So, CGT will be calculated on £184,000
It may also be possible to deduct costs associated with improvements made to the property, such as an extension.
Do I qualify for Private Residents Relief?
If you lived in the property for a number of years, and then rented it out, you may be able to reduce your overall CGT bill through Private Residents Relief (PRR). You can claim PRR for the number of years that the property was your main home, and also the last 9 months of ownership even if it is rented out.
Can I avoid CGT by gifting my second home?
You might think that by gifting a property, you can avoid CGT. But you will still be liable to capital gains tax if you gift a property or transfer it to someone else. Instead of a sale price, the property’s market value is used to determine the amount liable for CGT. This may still be a better option, so talk to your accountant to see if it would work for you.
How do I pay Capital Gains Tax on my second home?
From the moment you sell your property, you have 60 days to report and pay CGT to HMRC online. Your accountant can submit to HMRC, but you as the individual will have to make the payment.
If you fail to report and pay any tax due on UK residential property within 60 days of selling, you may have to pay interest and a penalty fee.
Bear in mind that if you are required to complete a self-assessment tax form, you’ll need to give details of any capital gains you’ve made at the end of the relevant tax year.
Can I manage the process myself?
With a number of tax allowances potentially available to you, having an expert to guide you is a good idea. Your overall CGT bill is likely to be lower and you can avoid making mistakes on your submission.
THP have created a special CGT service that will take away all the hassle and handle this on your behalf. To find out more and get an instant quote online – click here
Timing is important with CGT and by working with your accountant, you can be sure that submission deadlines will be kept and any late submission fines avoided.
About Karen Jones
Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.
With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.
Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”
Karen’s specialist skills:
- Personal Taxation
- Tax Efficient Planning
- Trust Administration