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The UK housing market has grown rapidly in recent decades, with property prices rising faster than wages in many areas. This has led to an increase in people buying second homes or buy-to-let properties as investments. However, important tax implications should be considered when buying and selling these properties.
Capital Gains Tax: Capital gains tax (CGT) is a tax on the profit you make when you sell something that has increased in value. It applies when you sell or ‘dispose of’ a second home, a buy-to-let property or land and buildings over the annual CGT allowance, which in the 2022/23 tax year is £12,300. For individual property owners, CGT is charged at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers on gains that exceed the allowance. This is lower than income tax rates, which makes property investment attractive for some. However, complex rules can catch people out.
Your Main Residence: Your main home is generally exempt from CGT. If you have two properties and sell one that was your main residence at any point, the period when you lived, there does not attract CGT. However, CGT may be due for periods when you let your ‘main’ residence, perhaps when you moved into a new property before selling the original one. The last nine months of ownership are always exempt, even if you were not living there then.
Second Homes: If you sell a property that has not been your main residence at any point since purchase, the entire capital gain will usually be subject to CGT. You are not entitled to any private residence relief. The gain is calculated as the difference between the purchase and sale prices. You can deduct certain costs like stamp duty, solicitors and estate agents fees, and improvement costs, which enhance or extend the property. You cannot deduct general maintenance costs or loss of value due to market conditions. If you later sell at a loss, you cannot offset this against other capital gains.
Buy-to-Let Properties: The capital gains position for buy-to-let properties is similar to second homes in that private residence relief does not apply, so CGT will be due on any gain when sold. However, the calculation is more complex because you can deduct certain costs as a landlord before calculating the taxable gain:
- Letting agency fees
- Accountancy fees
- Maintenance and repairs (but not improvements or renovations)
- Finance costs like mortgage interest ( possibly being restricted over time)
- Insurance premiums
Replacing a bathroom or kitchen would count as an improvement, which you could offset. But redecorating or replacing a broken tap would not.
Selling Part of a Property: Selling part of a property, such as the garden or garage, counts as part disposal, and the gain on that portion may be subject to CGT if not covered by the annual allowance.
Inherited Properties: If you inherit a property and later sell it, your gain for CGT purposes is calculated from the property value at the date of death, not the original purchase price. But you still get relief for costs associated with the sale.
Letting Relief: An extra relief called letting relief can further reduce the CGT liability for any periods when a property was your only or main residence but was also let out. Up to £40,000 of the gain attributable to letting can be exempt from tax, but this is also restricted if you live in the property.
Reporting Gains: Capital gains must be reported and paid to HMRC within 60 days of the sale of residential property. Limited payment options are available but need advanced planning.
Penalties apply for errors in reporting, so it is advisable to seek professional advice when calculating how much tax is due, especially for buy-to-let properties where allowable expenses can get complex. Second homes and buy-to-let properties are common in the UK, but heavy capital gains tax charges apply when sold at a profit. Private residence relief only applies to main homes, so tax planning opportunities are limited compared to other investments. Professional tax advice is essential to ensure proper reporting and payment of any CGT due.
If you need help with CGT compliance call our office to talk to one of our Tax Specialists.