Whether it’s your holiday home, a buy-to-let property, or a commercial investment, selling a second property requires you to consider the impact on your taxes – particularly Capital Gains Tax (CGT).
The tax you pay is based on the profit you make on the sale, the costs involved, and your income for that tax year. Currently, CGT is charged at 24% on gains above the basic tax rate. But, this can be reduced to 18% for basic rate taxpayers if your income doesn’t use all of your basic rate band (October 2024).
Unfortunately, you can’t avoid Capital Gains Tax completely, but there are things you can do to make the burden a little less painful. That’s precisely what we get into in this blog.
Keep reading to learn how much CGT is due on second properties and what you can do to make your Capital Gains Tax bill more manageable.
Calculating your gain after the property sale
When you sell a property that isn’t your main home, you must declare the sale to HMRC and pay Capital Gains Tax on the profit. It’s not the most exciting part of property sales, but understanding your CGT liability is key to being compliant and hopefully reducing the bill.
You only pay CGT on any profits above your Capital Gains Tax allowance, which is currently £3,000 per individual or £1,500 for trusts (tax year 2024/2025). You will, unfortunately, have to pay tax on any money earned above this allowance when you sell a second property.
How is Capital Gains Tax calculated on property?
Calculating the Capital Gains Tax is relatively straightforward.
The ‘gain’ is the difference between the proceeds received from selling a property (after deducting estate agent fees and other sales costs) and the original cost of the property, including any initial purchase costs.
What about money spent on the property since I have owned it?
If you’ve made any improvements to the property during your ownership, these are also factored into the allowable costs. As a general rule of thumb, HMRC allows costs that either extend the footprint of the property or change its internal layout.
However, repairs and maintenance costs (such as replacing kitchens, bathrooms, or windows) are rarely seen as allowable because they are simply replacing what is already there.
The cost of extending leaseholds or defending freehold rights is considered allowable.
What are the tax implications of selling a second home?
If you own more than one property, you will have to pay Capital Gains Tax when you sell any property other than your main home. You may also have to pay Income Tax if you’re a landlord earning rental income from any of the properties.
Although your main home can be eligible for tax relief, this can only apply to one property at a time.
Can I reduce my CGT on a second home?
There are a few opportunities for reducing CGT on a second home. If you have used the property as your own home at any time or you are married, you may be able to make use of tax relief or the tax-free allowance to reduce how much you owe. But the rules can be complicated.
Let’s explore some of these Capital Gains Tax savings in more detail.
Marriage allowance
Married couples and civil partners may be able to reduce the overall tax charge by transferring the property into joint names or changing the ownership split between them. This allows you to split the gain between you and your partner and use each person’s annual CGT allowance.
But, always review these options before agreeing to a sale, as the ownership position cannot be changed once the property is sold.
Read more: How do Capital Gains Tax rules affect divorcing couples?
Utilising Private Residence Relief
If you have more than one property that you use personally, you can make an election to have HMRC nominate one as your primary residence. If, for example, you live in your London flat during the week and spend the weekends in your country cottage, both properties may qualify for the relief, but only one of them can benefit.
It is not always obvious which property should have the relief. Many factors will impact your decision, such as how long you plan to keep the property and which one is likely to make a higher gain.
We will happily guide you through this decision, as you only have two years from acquiring a new property to make this election. Without it, HMRC will allocate the relief based on actual occupancy, which may not be the most tax-efficient solution for you.
You may still be able to claim main residence relief on your home if you are required to live elsewhere because of work. However, this relief does not apply to all jobs, and there may be additional conditions to qualify.
Claiming Letting Relief
Relief for main residences went through a major overhaul in 2020. Letting Relief had given substantial additional savings previously, but applies only in very limited circumstances after 2020.
Now, the Letting Relief only applies in situations where you live in the property with a tenant (like having a lodger).
Other ways to reduce your Capital Gains Tax
If you have other assets that have fallen in value, you may want to consider selling them to realise the loss and offset it against your Capital Gains Tax bill. Losses made in previous years can also be used against the gain made by selling a property, if you haven’t already used them.
Alternatively, investing some of your sale proceeds in tax-advantaged schemes, such as the Enterprise Investment Scheme or the Seed Enterprise Investment Scheme, can defer some of the Capital Gains Tax on a second house sale. However, these investments usually involve high risks!
What about gifting property to relatives?
We are often asked if giving the property to family members or putting it into a limited company will reduce the tax. This is a route that some may consider, but it rarely helps because HMRC treats the property as though you sold it at market value.
Optimise your tax position with Butt Miller
Property taxes are complicated. Don’t wait until you’re ready to sell before checking which tax reliefs and allowances you’re entitled to. Planning ahead can save you money, time and hassle.
At Butt Miller, we help you see the bigger financial picture when it comes to selling a second property. We’ll help you optimise your tax position and account for what you owe. Contact Butt Miller today to save on your CGT bill.
Read more: how to reduce your Capital Gains Tax bill for buy-to-let investments.
