19th May 2023
So you want to sell your second home? Or your rental property? For something that is so common, letting agents or conveyancers rarely give any helpful tax advice outside of Stamp Duty.
Capital Gains Tax
Capital Gains Tax, or CGT to its friends, is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) when it has increased in value. CGT has its own separate rates and allowances for the Income Tax you pay on your salary.
You generally won’t pay CGT when you sell your main home unless in exceptional circumstances, such as if it has been used as a business premise or if you have let out all or part of your property (this doesn’t include lodgers under the Rent-a-Room scheme where you also live there).
You will, however, pay CGT when you sell a property that you purchased as a buy-to-let or holiday home, even if it is the only property you own.
What is my main residence?
If you own multiple properties, you need to understand and nominate the one that is your primary residence, or ‘Principle Private Residence (PPR)’. Your PPR depends on your actual circumstances and how you use it. This can change over time. For example, you could rent out a property that used to be your main home after moving in with a new partner. With the old house no longer being your PPR once it is let, your new home with your partner becomes your PPR, even if you do not own it.
These timelines are important from a CGT perspective as there is relief available for periods a property was your main home over a total period of ownership. If you live in more than one property, then you may declare – within two years of a change in the combination of your residences – which is your main residence for these purposes, even if one of them is not in the UK. If you do not make such a nomination, the question will be decided based on the facts presented to HMRC.
Property sales incur higher rates of CGT than other types of assets. The rate you pay is determined by your income tax bandings. Basic Rate taxpayers will pay 18%, then 28% (the same as Higher Rate taxpayers) on the remainder of the gain that crosses the Higher Rate threshold.
Allowances and Expenses
Every UK taxpayer receives an annual CGT allowance, separate from their Income tax personal allowance. The CGT allowance for disposals from 6th April 2023 is £6,000, so you can make a gain of up to that amount before any tax is due.
When calculating your CGT liability, you can deduct certain expenses and losses from your gains. Allowable expenses may include legal fees, estate agent fees, and survey costs, while allowable losses may include losses on other UK residential properties sold in the same tax year.
If an eventual loss is made, you may be able to roll this forward to a future year to offset against a potential gain you make.
Reporting to HMRC
Property sales since 6th April 2020 have been subject to HMRC’s new reporting rules. Previously, you would make the declaration and pay the relevant tax on your next tax return. This would mean CGT generated on a profit on 6th April 2023 wouldn’t have been payable until January 2024.
The new rules require reporting and payment within 30 days of the completion of the sale via HMRC’s own Capital Gains Tax on the UK Property portal.
CGT is a very complex area, and it is important to speak with an experienced tax consultant if you are thinking of selling a second property.
How can MyAccountant help?
If you’re planning to sell a residential property in the UK, it’s important to be aware of the CGT rates and allowances, as well as the reporting requirements to HMRC. By understanding these rules and regulations, you can ensure that you comply with your tax obligations and avoid any penalties or fines.
Remember, these rules and rates are subject to change, so it’s always a good idea to stay up to date with the latest information from HMRC. If you’re unsure about anything, you can speak to one of our team for more guidance.
Should you need a tax expert on your side, please get in touch either by sending an e-mail to email@example.com or calling us on 0800 917 9100.