by Iain Mason
Published on 5th August 2019
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 whereCapital Gains Tax (CGT) is due, you have to pay this by January 31 after theend of the tax year in which the gain arose. In some cases this could leave youholding 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 sellinga property where CGT is due will need to settle this liability within 30 days ofthe completion of the sale. This could create cashflow difficulties in gettingthe funds to be able to pay the tax in such a short time.
Failure to pay will most likely lead to HMRC charginginterest and penalties.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit you make when yousell an asset that has increased in value. Capital Gains Tax on second homesfalls into this category.
It’s the gain you make that’s taxed, not the amount of moneyyou receive.
There are specific reliefs from CGT for people selling theirprincipal private residence and generally these ensure there isn’t any tax topay.
The problems arise where the property is not a principalprivate residence, or was but for only part of the period it was owned. Secondhomes and property investments will not enjoy any principal private residencereliefs.
How much is Capital Gains Tax on second homes?
There is a higher rate of CGT to pay on the gain you make ona property sale than there is on other assets.
If you are a basic rate taxpayer, you will pay 18% on any gainyou make on selling a second property.
If you are a higher or additional rate taxpayer, you willpay 28%.
With other assets, the basic rate of CGT is 10%, and thehigher rate is 20%.
It is important to note, that any capital gains will beincluded when working out your tax liability and as a result other income couldtherefore push you into a higher tax bracket.
All taxpayers have an annual Capital Gains Tax allowance, whichmeans 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.
How much CGT will I pay?
Capital Gains Tax is only paid, and at the rates outlineabove, on the gain that has been made between the cost when you bought theasset and the amount you sold it on for.
To work out your gain, you need to deduct the amount youoriginally bought the property for from the sales price.
You can also take off any legitimate costs involved withbuying and selling. This can include legal fees, estate agents’ fees, StampDuty 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 canoffset this against the gain you make on another sale and so reduce the amounton which CGT is liable. Losses can be claimed for up to four years after theywere incurred.
Clearly, the issue of Capital Gains Tax on second homes isnot straightforward!
The advice from the legal team here at Optimum is that anylandlords, second homeowners or property investors thinking of selling withinthe next 12 months should take specific advice to determine the ‘tax cost’ ofselling before or after 6 April 2020.
Our Swindon conveyancing team can advise on Capital Gains Tax and second homes, as well as offer any legal advice around buying or selling property. If you would like to engage our services please get in touch and we would be happy to give you a competitive quote.
