Capital Gains Tax On Second Home

You can usually sell your primary home without worrying about capital gains tax, but different rules apply to second homes which are used as vacation homes and rental properties.

What is capital gains tax on property?

You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell (or ‘dispose of’) second properties that are not your home, for example:

• Buy-to-let properties
• Business premises
• Land
• Inherited property

How much capital gains tax do you pay?

When it comes to how much capital gains taxes you have to pay will depend on various factors, including:

• If you have lived in the second home
• Whether you have made gains on other taxable investments in that financial year
• Whether you are a higher or basic rate taxpayer.

You’ll need to work out your gain to find out whether you need to pay Capital Gains Tax.

Your gain is normally what you sold the house for minus what you paid for the house. Assuming you sell it for more than you bought it for then there will be a financial gain in selling a second home.

If you're a basic-rate taxpayer, you pay Capital Gains Tax at a rate of 18% of any gain while higher-rate taxpayers pay 28%. Non-taxpayers pay Capital Gains Tax at 18% assuming that the gain is greater than the annual  Capital Gains Tax exempt amount of £11,000 for individuals (in the 2014-15 tax year).

The good news is that homeowners can minimise their capital gains tax on second homes or holiday home.

If you are buying a second property

By taking professional advice at the earliest stage you may be able to plan your ownership in a way that will mean you pay little or no tax if you later decide to sell through Principal Private Residence (PPR)

Principal Private Residence (PPR) relief means that no capital gains tax payable on any gains arising when someone sells the home in which they live.

If you have more than 1 property you can choose which property is your main residence. The tax relief generally applies to the time which you have occupied the property as your main residence, however the tax rules say that the last 3 years of ownership count towards a period of residence, even if the owner was not living there. This means it is possible to rent out a second home for up to three years before selling the second home, all without losing valuable relief.

If you are selling a second property

Your options for saving capital gains tax will depend on the timescales involved. If you already have a buyer lined up but have never lived in the property then it may be too late for tax planning. The reason being that you usually have to be able to demonstrate that you have lived in the property, and it has been your Principal Private Residence, for at least six months but preferably a year before you are able to sell without incurring any CGT at all.

If you live in your home for two out of the five years immediately preceding its sale, and it has been your principal residence then you probably won't pay capital gains tax.

If you are not sure of your position, you will need someone to advise you on what your liability will be and help you to ensure that you don’t pay more tax than is necessary. We can do this.

Capital Gains Tax Advice On Second Homes

Whether your second property is at home or abroad, careful planning will usually save tax. If you are selling a property which is not your main home then your key issue is likely to be Capital Gains Tax (CGT). If you are buying another property, reviewing your Will and checking your Inheritance Tax (IHT) position are likely to be key.

The most important thing is to look at your overall position and all the tax implications together and then plan accordingly.

This is where we can help.

Please contact one of our accountants in Scunthorpe who work with second property owners across Lincolnshire. There are lots and lots of other tried and tested capital gains tax planning strategies for second homes. Please contact us if you have any questions or would like specific landlord advice relevant to your personal circumstances.