Capital Gains Tax on second homes will be affected by new rules which come into force in April 2020, also impacting on second home owners and property investors.
Currently, if as a UK resident you sell a property where Capital Gains Tax (CGT) is due, you have to pay this by January 31 after the end of the tax year in which the gain arose. In some cases this could leave you holding the ‘tax’ for up to 21 months before it has to be paid to HMRC.
But from 6 April 2020 the rules are changing. Anyone selling a property where CGT is due will need to settle this liability within 30 days of the completion of the sale. This could create cashflow difficulties in getting the funds to be able to pay the tax in such a short time.
Failure to pay will most likely lead to HMRC charging interest and penalties.
Capital Gains Tax is a tax on the profit you make when you sell an asset that has increased in value. Capital Gains Tax on second homes falls into this category.
It’s the gain you make that’s taxed, not the amount of money you receive.
There are specific reliefs from CGT for people selling their principal private residence and generally these ensure there isn’t any tax to pay.
The problems arise where the property is not a principal private residence, or was but for only part of the period it was owned. Second homes and property investments will not enjoy any principal private residence reliefs.
There is a higher rate of CGT to pay on the gain you make on a property sale than there is on other assets.
If you are a basic rate taxpayer, you will pay 18% on any gain you make on selling a second property.
If you are a higher or additional rate taxpayer, you will pay 28%.
With other assets, the basic rate of CGT is 10%, and the higher rate is 20%.
It is important to note, that any capital gains will be included when working out your tax liability and as a result other income could therefore push you into a higher tax bracket.
All taxpayers have an annual Capital Gains Tax allowance, which means you can make gains up to a certain amount tax free. For the tax year 2019/2020, the CGT allowance is up to £12,000 per individual; for 2018/19 it was £11,700.
Couples who jointly own assets can combine this allowance, potentially avoiding CGT on a gain of £24,000. Any unused allowance cannot be carried forward – so you use it or lose it.
Capital Gains Tax is only paid, and at the rates outline above, on the gain that has been made between the cost when you bought the asset and the amount you sold it on for.
To work out your gain, you need to deduct the amount you originally bought the property for from the sales price.
You can also take off any legitimate costs involved with buying and selling. This can include legal fees, estate agents’ fees, Stamp Duty and upgrades you made to the property when you owned it.
You can also offset losses against the ‘gain’. For example, if you are a property investor and make a loss on a property sale, you can offset this against the gain you make on another sale and so reduce the amount on which CGT is liable. Losses can be claimed for up to four years after they were incurred.
Clearly, the issue of Capital Gains Tax on second homes is not straightforward!
The advice from the legal team here at Optimum is that any landlords, second homeowners or property investors thinking of selling within the next 12 months should take specific advice to determine the ‘tax cost’ of selling before or after 6 April 2020.
For any help or advice with property buying and selling, or Capital Gains Tax on second homes, please get in touch with the team at Optimum, who specialise in advising on property transactions and can cover both the legal and tax aspects that arise.