Navigating Capital Gains Tax when selling a second home

DSA Prospect - Navigating Capital Gains Tax when selling a second home

Although the filing deadline was extended in October 2021, many landlords and individuals are still failing to meet Capital Gains Tax reporting requirements on the sale of a second home. DSA Prospect Director, Nick Longford offers valuable insight and advice on how to avoid penalties and benefit from exemptions and allowances.

According to HMRC, London and the South East of England have consistently accounted for the majority of Capital Gains Tax taxpayers, making up around 40% of the total taxpayers and nearly half of the overall gains and liability.

While government reports indicate an increase in Capital Gains Tax reporting in recent tax years, a large portion of CGT-liable individuals are still receiving penalties for filing late or neglecting to factor in tax costs when making the decision to sell.

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Selling a property can be a great or even necessary financial move, but it's important for UK homeowners to understand the potential tax implications. If you're considering the sale of a home that is not your primary residence, it's crucial to have a clear understanding of your tax liability and explore options for reducing your Capital Gains Tax bill.

Here's what you need to know about Capital Gains Tax on the sale of a second home:

In April 2020, the deadline for reporting Capital Gains Tax on the sale or disposal of a residential property, including those held by trustees and personal representatives, was set within 30 days of completion. However, for properties that completed on or after 27 October 2021, the deadline was extended to 60 days, after criticisms regarding unrealistic timeframes.

How much Capital Gains Tax will I have to pay on a second home?

The amount of Capital Gains Tax (CGT) you owe on the sale of a second home depends on two key factors: the profit you gain and your income tax band.

The gain is calculated by subtracting your allowable expenditure, such as purchase price and legal fees, from the sale price. This balance amount is then taxed at either 18% or 24%, depending on your personal tax rate.

Income tax bands and Capital Gains Tax rates 2024/2025

Income tax band Capital Gains Tax rate
Basic Rate  18%
Higher Rate 24%

Reducing your Capital Gains Tax bill

To optimise your financial gains when selling a second property, it's worth noting that there are ways to reduce your Capital Gains Tax liability. You can take advantage of exemptions and allowances, such as Private Residence Relief, or consider deducting any capital expenditure on the property that has not yet been claimed on tax returns.

These options have specific criteria and limitations and we recommend working with a tax professional to ensure you are compliant.

Private Residence Relief

Private Residence Relief (PRR) is an exemption that can help reduce Capital Gains Tax liability when selling a primary residence. While typically only applicable to properties used as the homeowner's main residence throughout the entire period of ownership, those selling a second home that was their primary residence for part of the ownership period may still be eligible for PRR on a portion of the gains made during the sale.

Capital expenditure

If you've invested in your second home by making improvements you may be able to deduct these expenses from the sale price to lower your taxable gain and decrease your Capital Gains Tax liability. However, it's important to note that not all capital expenditures are eligible for deduction. To make the most of your tax savings, you will need to ensure that you're claiming all allowable deductions while avoiding any penalties for non-compliance.

Penalties for filing Capital Gains Tax late

Failing to file and pay Capital Gains Tax within the 60-day timeframe can result in penalties and interest charges. The penalties start with a fixed charge of £100 for late filing, which increases to a further penalty of £300 or 5% of any tax due, whichever is greater, for periods exceeding six months.

Capital Gains Tax penalty charges

Deadline missed by Penalty amount
up to 6 months £100
more than 6 months a further £300 penalty or 5% of any tax due (whichever is greater)
more than 12 months a further £300 penalty or 5% of any tax due (whichever is greater)

Individuals are usually required to report their Capital Gains Tax twice – once directly to HMRC using the relevant CGT return form within 60 days, and then again when they do their Self Assessment tax return. The tax you've already paid as part of your Capital Gains Tax return should be deducted from your personal tax return to prevent double taxation.

How can DSA Prospect help?

It's highly recommended to seek guidance from a tax professional to ensure that you're well-informed about your obligations and opportunities concerning CGT, especially if you're a non-UK resident or own property outside of the country. Moreover, it's crucial to stay up-to-date with the latest tax regulations because the rate of CGT can fluctuate due to government policies.

If you're looking to sell your second home and are concerned about mitigating your tax exposure, our team of tax experts is here to provide guidance and support. Don't hesitate to reach out to us for a consultation on how to optimise your financial gains and reduce your Capital Gains Tax liability.

Navigating Capital Gains Tax when selling a second home

This blog was updated on: 06/04/2024

This blog was originally published on: 15/05/2023

Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.

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