Selling a second home can be an exciting prospect, but it’s essential to understand the Capital Gains Tax (CGT) rules that apply. If you’re unaware of these regulations, you could face unexpected tax bills, penalties, or missed opportunities for savings.

In this blog, we aim to ensure you’re informed and prepared when the time comes to sell your second property.

Understanding CGT on second homes

Capital Gains Tax is a tax on the profit when you sell an asset that has increased in value. In the case of a second home, this tax applies to the difference between the purchase and sale prices after deducting any allowable expenses.

You’re generally exempt from CGT if you sell your main residence due to Private Residence Relief (PRR), However, this relief doesn’t apply to second homes. The profit from second properties is subject to CGT, and understanding the rate at which you’ll be taxed is crucial.

Current CGT rates for property

The current CGT rates for individuals vary depending on your income tax bracket:

• Basic rate taxpayers: 18% on gains from residential property.
• Higher and additional rate taxpayers: 24% on gains from residential property.

These rates are higher than those for other assets, which are 10% and 20%, respectively. This is why knowing the tax implications when selling a second property is important.

Reporting the sale within 60 days

One of the most important aspects of selling a second home is reporting the sale to HMRC within 60 days. This rule was introduced in April 2020 to speed up the payment of CGT. Unfortunately, many people are still unaware of this requirement, which can result in late penalties.

Once the sale is completed, you must calculate the gain, report it using HMRC’s online service, and pay the CGT owed within this 60-day window. Failing to meet this deadline can lead to fines and interest on the outstanding tax, so acting quickly is vital.

Reducing your CGT liability

You can reduce your CGT liability when selling a second home in several ways. Here are some strategies to consider:

1. Use your annual CGT allowance: Each individual has an annual CGT allowance, which is £3,000 for the tax year 2024/25. You can profit up to £3,000 before any CGT is payable.
2. Offset allowable expenses: You can deduct certain expenses from your gains, such as buying and selling the property (e.g., legal fees, stamp duty, and estate agent fees) and improvements (but not repairs or maintenance).
3. Transfer ownership: If you’re married or in a civil partnership, you can transfer the property to your spouse or partner. This allows you to use both CGT allowances, potentially reducing the overall tax bill.
4. Consider letting relief: If the property was your main residence at any time, you might qualify for letting relief. This relief can reduce the gain on which CGT is payable, although the rules around it are strict, and the relief was significantly reduced from April 2020.
5. Plan your sale carefully: If you plan to sell more than one property or other assets in the same tax year, you may be able to stagger sales to minimise your tax bill. This approach requires careful planning and a good understanding of the CGT rules.

Common pitfalls to avoid

When selling a second home, there are several common mistakes that can lead to higher tax bills or penalties:

• Not reporting the sale in time: The 60-day reporting window is non-negotiable. Missing this deadline can be costly, so make sure you’re prepared to act quickly once the sale is finalised.
• Misunderstanding your tax bracket: Knowing which tax bracket you fall into is important, as this determines the CGT rate you’ll pay. Higher and additional rate taxpayers will face a 24% charge, significantly more than the 18% paid by basic rate taxpayers.
• Overlooking allowable expenses: Make sure you claim all the allowable expenses you’re entitled to. This can significantly reduce your CGT liability but requires careful record-keeping and a clear understanding of an allowable expense.
• Failing to seek professional advice: Selling a second home and navigating the CGT rules can be complex, especially if you’re trying to minimise your tax liability. Professional advice can help you avoid costly mistakes and make the most of any reliefs or allowances available.

Final thoughts

Selling a second home involves several tax considerations, and understanding the CGT rules is key to ensuring a smooth process. With the right preparation and advice, you can manage your tax liability and avoid unpleasant surprises.

At P B Syddall & Co., we’re here to help you manage CGT. Our team of experienced accountants can provide tailored advice to help you understand your obligations, reduce your tax bill, and ensure you meet all reporting requirements.

If you’re planning to sell a second property, get in touch with us to discuss how we can help you make the most of your sale.