Selling a second property – Consider these Capital Gains Tax tips
Are you thinking about selling a second home or perhaps a holiday let? You are likely to incur a Capital Gains Tax (CGT), as the sale will not benefit from the Private Residence Relief that is available on the sale of a main home.
Depending on your tax status, this may mean that you face a tax charge of up to 28 per cent on the gains you have made on the property.
As well as affecting landlords, this tax can also affect those that take possession of a home after a loved one dies, so it is important to understand the potential liabilities you face.
How to calculate a CGT liability on a property sale?
Calculating your CGT liability is fairly simple. All you have to do is deduct the purchase price from the final sale price at completion to calculate the ‘gains’ on the sale of the property.
As part of this equation, you can also include legitimate costs, which may reduce the size of the gain you achieve through a sale.
Once you have figured out your gains you divide it by the rate at which you pay CGT, either 18 per cent for a basic tax rate taxpayer or 28 per cent if you pay tax above the basic rate.
How to reduce your CGT liability on a holiday let or second property
- CGT tax-free allowance – Make sure you use your £12,300 tax-free allowance as this cannot be carried forward from one year to the next.
If you have already made use of your tax-free allowance, it is worth considering delaying the sale of a property until the next tax year to use that year’s tax-free amount.
- Joint ownership with a spouse – By having joint ownership of a property, you can combine both your tax-free allowances to a total of £24,600. If your spouse is in a lower tax band, this could also influence your final bill.
- Legitimate costs– There are certain costs that you can factor into your CGT bill. These are:
- Incidental Costs: including solicitors fees, surveyors’ fees, and estate agent fees
- Stamp Duty Land Tax (SDLT)
- Improvement Work Costs: these are classified as work that enhances the asset
- Lettings relief – Since April 2020 the rules around letting relief have changed. However, if you have lived in the property at the same time as your tenants you may still be eligible to reduce the amount of CGT you owe following a sale.
If you need advice on the tax implications of selling a property, please speak to us.