If you own a second home, such as a holiday cottage, a buy-to-let property, or an inherited house, you may have to pay capital gains tax (CGT) when you sell it. CGT is a tax on the profit you make when you sell an asset that has increased in value. The current CGT rates for residential property are 18% for basic rate taxpayers and 28% for higher rate taxpayers. However, there are some ways you can reduce or avoid paying CGT on your second home when you sell it. In this blog post, we will explore some of these options and provide some tips on how to plan ahead.
Use your annual exempt amount
Everyone has an annual exempt amount, which is the amount of gains you can make in a tax year without paying any CGT. For the 2023/24 tax year, the annual exempt amount is £6,000 per individual. You can use this allowance to offset some or all of your gains from selling your second home. For example, if you sell your second home for £200,000 and you bought it for £150,000, you have made a gain of £50,000. If you have not used your annual exempt amount for any other assets, you can deduct £6,000 from your gain, leaving you with a taxable gain of £44,000.
Transfer some or all of your second home to your spouse or civil partner
If you are married or in a civil partnership, you can transfer some or all of your second home to your spouse or civil partner without paying any CGT. This can be a useful way to use both of your annual exempt amounts and lower your CGT rates. For example, if you and your spouse are both basic rate taxpayers and you sell your second home for £200,000 and you bought it for £150,000, you have made a gain of £50,000. If you transfer half of your second home to your spouse before selling it, you will each have a gain of £25,000. You can then each use your annual exempt amount of £6,000 to reduce your taxable gains to £19,000. You will each pay CGT at 18% on your gains, resulting in a total tax bill of £6,840. If you had not transferred any of your second home to your spouse, you would have had a taxable gain of £44,000, which would have pushed you into the higher rate tax bracket. You would have paid CGT at 28% on your gain, resulting in a tax bill of £12,320. So by transferring it, you get a tax saving of £5,480
Claim private residence relief
Private residence relief (PRR) is a tax relief that exempts you from paying CGT on the sale of your main home. However, you may also be able to claim PRR for your second home if you meet certain conditions. To qualify for PRR, you must have lived in your second home as your main residence at some point during your ownership. You can then claim PRR for the period you lived in your second home, plus the last 9 months of your ownership, regardless of whether you lived there or not. For example, if you sell your second home for £200,000 and you bought it for £150,000, you have made a gain of £50,000. If you lived in your second home for 2 years out of the 5 years you owned it, you can claim PRR for 2 years and 9 months, which is 57% of your ownership period. You can then deduct 57% of your gain, which is £28,500, from your taxable gain, leaving you with £21,500. You can then use your annual exempt amount of £6,000 to reduce your taxable gain to £15,500. You will pay CGT at 18% or 28% on your gain, depending on your income tax rate.
Defer the capital gain
You can defer some or all of the capital gain by reinvesting the proceeds into an enterprise investment scheme (EIS) company or portfolio of companies or SEIS scheme in the same or following year as the property sale
The gain is deferred until the EIS investment is sold. Also, when it is sold, and the deferred gain becomes taxable, the rates of CGT which apply are lower, i.e. 10% and 20% compared with 18% and 28%.
A maximum of £100,000 can be invested into an SEIS company, he could exempt £25,000 of the gain on the sale of the second property. This would reduce the CGT by £4,500
Trap. There are drawbacks with EIS and SEIS investments. You have to tie up your money to get the tax savings and the investments are relatively risky especially, SEISs.
Convert into a Furnished Holiday Let
Since you have experience of letting the property you might choose to continue to do so for a couple of years before selling. This would switch you from long to short-term lets, i.e. 30 days or less.
If the property is furnished and available to rent for period of up to 30 days at a time for 210 days per year, and actually let for 105 days, it will qualify as a furnished holiday let (FHL).
As a FHL for two consecutive years, any gain you make from selling qualifies for business asset disposal relief (BADR) which reduces the CGT rate down to just 10%
Plan ahead and seek professional advice
As you can see, there are various ways you can save CGT when selling your second home, but they all require careful planning and timing. You should also be aware of the rules and conditions that apply to each option, as well as the potential implications for other taxes, such as income tax, stamp duty, and inheritance tax. Therefore, it is advisable to seek professional advice from LeeP Accountants.