Tips for Deferring Gain from the Sale of a Second Home

You must pay capital gains tax on any profits you make when you sell a second home or a buy-to-let property.  

Read on to learn more about capital gains taxes, how they operate, and how to avoid paying them on second homes.

Definition of Capital Gains Tax

A tax known as capital gains tax (CGT) is imposed when an investment or a piece of property is sold. With regard to a second home, capital gains are most frequently paid to HMRC (Her Majesty's Revenue and Customs).

Regardless of how you make the profit, including if you gift the property or exchange it for another asset, you must pay capital gains tax.

How Do Capital Gains Taxes Operate?

When you sell a property or other asset, you must pay capital gains tax on the profit you make.

For instance, if you paid £300,000 for the property, made improvements to it, and then sold it for £500,000, you would have to pay CGT on the profit of £200,000.

When Is A Property Subject To Capital Gains Tax?

If you sell a second or first property for a profit, you must always pay capital gains tax:

• purchase-to-rent homes
• business locations
• land
• inherited possessions

The guidelines for paying capital gains on the primary residence and second property differ. If you meet certain requirements, you might be able to completely avoid paying CGT on your primary residence.

For second homes, you must pay CGT if you:

• Sell it (whether you bought it or received it as an inheritance).
• If the value of the property increased, a gift
• Transfer some of it to another person.

How to Calculate Capital Gains Tax

Your obligation to pay CGT on second homes is based on:

• The revenue you generated from the same
• The tax rate you pay
• The costs associated with any home upgrades

Currently, basic rate taxpayers pay 18% in capital gains taxes, while higher rate taxpayers pay 28%.

You would owe CGT on the £200,000 profit, or £36,000 for basic rate taxpayers (at 18%) and £56,000 for higher rate taxpayers (at 28%), if you purchased your second home for $100,000 and sold it for £300,000.

The good news is that tax deductions may allow you to lower both that sum and the capital gains tax for the second home.  

Annual Exemption from Capital Gains Tax

UK residents are eligible for up to £12,300 in tax-free capital gains for the 2021–2022 tax year.

You won't owe HMRC any capital gains tax if the property's value hasn't increased by more than that amount or if you've made less profit than that.  

When combining their allowances, couples who own assets jointly can make a tax-free gain of up to £24,600.

Methods For Lowering Or Avoiding Second Home Capital Gains Tax

When selling a second property, you may be able to lower the capital gains tax you owe to HMRC or even avoid paying any taxes at all, depending on your specific situation.

How to lower capital gains taxes when buying a second home

There are a few factors you should take into account that can reduce the amount of capital gains taxes you owe on a second home, such as:

• Annual CGT allowance
• Stamp duty
• Fees for estate agents and lawyers
• Costs of surveying and valuation
• Costs associated with improvement projects - e g a continuation

You can subtract all of these costs from your income before figuring out how much capital gains tax you must pay on the second property.

For instance, your CGT will be calculated at £177,700 if you have paid £5,000, £5,000 in solicitor and estate agent fees, and £12,300 in annual allowance.

Accordingly, if you're in a lower tax bracket, you'll need to pay £31,986, and if you're in a higher tax bracket, you'll need to pay 49,756.  

How Can I Sell a Second Home Without Owing Capital Gains Tax?

To completely avoid paying capital gains tax on a second home, there are two options.

Your residence should be changed.

Changing your second residence into your primary residence is the simplest way to avoid paying capital gains tax on a second property. When a person owns two homes, they may designate one to be treated as their primary residence under UK law.  

If a UK resident sells their primary residence and meets certain requirements, they automatically qualify for Private Residence Relief; however, this exemption does not apply to CGT on second homes.

Sell it immediately.

Because the property is unlikely to increase in value to the point where it would exceed your annual CGT allowance, if you inherit property and sell it right away, you might be able to avoid paying capital gains taxes.  

The government only demands CGT from inheritors when they sell the property for a profit and do so after receiving it as a gift.  

You must pay capital gains for a second home if you profit from the sale of an inherited home and can offset the cost with your tax deduction and other expenses.

What Is Relief for Private Residence?

With the help of the private residence relief (PRR), homeowners can completely avoid or pay less capital gains tax on property profits, including capital gains tax when selling a second home.

Principal house

When selling your primary residence, PRR can only assist you in avoiding CGT if you satisfy all of the following requirements:

• You've only ever lived in one house during the time you've owned it.
• Part of it hasn't been let out by you.
• You haven't only used it for work-related purposes,
• The house isn't bigger than 5,000 square meters.
• You didn't buy it to sell it.

2nd house

You may be eligible for relief when selling a second home depending on the amount of money you make and how long you've owned the home. You will always receive relief for the years that you lived in the house and the last nine months that you owned it.  

How Does the CGT on Second Homes Affect the Private Residence Relief?  

You make a taxable gain of £50,000 if you spend £190,000 on a non-primary residence and later sell it for £240,000.

You will receive relief for the two years you lived there before you began renting it out (or simply used it as a vacation home), plus nine months after you moved out.  

This means that you will be eligible for 33 months of private residence relief and an exemption from paying capital gains tax on the second home's 46% gain, which amounts to £23,000. On a second property, you will still be required to pay capital gains taxes for the remaining 54% of the gain, or £27,000.  

What Is The Best Way To Pay Capital Gains Tax On My Second Property?

Once you determine how much you must pay in taxes for the sale of a second home, you must notify HMRC of the amount you owe.  

Once HMRC sends you a payment reference number, you can pay your capital gains tax by:

• Bacs
• Cheque
• Speedier Payments
• CHAPS

When should capital gains tax be paid?

The 31st of January following the end of the tax year in which you made the profit is when you must pay capital gains tax on your second home in the UK.  

For instance, you must pay your capital gains tax by 31 January 2023 if you made a gain between 6 April 2021 and 5 April 2022.

If capital gains tax is not paid, is there a penalty?

The HMRC will charge you interest and a penalty if you pay your bill after the due date. The late payment penalty for the sale of a second home is 5% of the unpaid tax.

To sum up

You'll probably have to pay capital gains tax if you sell property or other assets. If you're selling your primary residence, there are some ways you can avoid it, but if you're selling your second home, you might only be able to lower the amount you owe using your tax allowance and Private Residence Relief, among other things.