Are you owning a second home and want to sell it soon in the UK? The process is not cumbersome when you know the steps in detail.
The basic rate for taxpayers varies between 10% and 18%. The rates for capital gains will vary depending on the house property type.
Moreover, the provisions for selling the second home will be different than the first one. Avoid capital gains tax on selling your second home. Learn about the tricks and tips from this guide.
I will present the potential impact the sale can have on your financials. If you are planning to sell the second property after your retirement, it must give a good return.
Therefore, make the decision wisely for maximum benefit.
Keep track of the changed capital gains rate in the UK before you make any sale or purchase. This guide will help you plan appropriately.
Meaning of Capital Gains Tax in the UK
Capital Gains are excess income from the sale of a property. In accounting terms, they are the profit from disposing of an asset.
Capital gains arise when you sell a property at a value over its purchase value. The taxes imposed on this profit are known as the Capital Gains Tax.
The Capital Gains Tax rate differs between basic and higher-rate taxpayers. 10% or 18% is normal for basic-rate taxpayers.
On the other hand, if you fall under the higher or additional taxpayer categories, you may have to pay a higher tax of 20% or 28%.
As per the CGT provisions, if you enter the higher tax band due to the Capital Gains, you must pay taxes on both rates.
An example of capital gains tax in the UK is as follows:-
Suppose you have a house property worth £90 lakhs. You sell it off at £1 Crore. Therefore, your capital gains will be £10 lakhs.
However, there is a special provision to avoid capital gains tax. You can get a capital gain allowance of £3000 as an individual taxpayer.
The capital gains are taxable only when selling your second home, not the main house. All these provisions and detailed tax calculations will be available from professional sites like Tax Scouts.
Want to learn the splendid theories of how to avoid capital gains tax on second homes UK? Follow this piece for some amazing methods.
How to Avoid Capital Gains Tax on Second Home?
Are you owning a second house property in the UK, used for vacation purposes or as a farmhouse? Then please plan before you ultimately sell it off.
The provisions for sales of this second home will attract Capital Gains tax, unlike the sale of your primary home. Whether you have inherited or bought this second property does not matter.
The tax on the excess amount on the sale consideration is a mandatory requirement whenever you are selling a home in the UK.
The tax amount depends on your tax band and the amount of profits on the sale of the property. However, there are several ways to avoid capital gains tax on the sale of this second home.
Allowance
The primary way to avoid capital gains tax on second homes UK is by taking advantage of the Capital Gains allowance as allowed by the State.
Previously, this amount used to be £12,300. However, as per the recent UK tax laws, this amount has decreased to £6000 in 2023. Besides, starting in 2024, the amount will be reduced further to £3,000.
This implies that if your profit on the sale of the second home exceeds the threshold of £3,000, then only you will be liable to pay taxes.
If the house property is in the joint names, for example, you and your spouse, then you can combine your tax allowance limits. This is a good way to plan taxes and avoid paying excess CGT.
Stamp Duty
Do not think that Capital Gains Allowance is the only way of lessening your tax burden on selling a second home.
You can take advantage of stamp duty deduction to arrive at a lower Capital Gains amount.
Furthermore, you may also deduct certain other fees like estate agent’s charges, solicitor fees, charges for repairs, valuation fees, etc.
These amounts must be connected with the transfer of the property to the new buyer.
For example, if the total of such ancillary charges total up to £50,000, then you will get a relief of this amount from your original taxable value.
Declaration as Primary Residence
Another fruitful method to avoid capital gains tax on second homes UK is to disclose your second home as your Primary Residence.
Within two years of owning your second house, you have the freedom to declare any of your house properties as your primary residence.
However, you must remember that the right is limited to these two years only.
As per UK laws, if you declare the house you want to sell as your primary residence, you will not have to pay any CGT on the profits.
The scenario will be clear if I elaborate on it with an example.
Suppose you own a dwelling and buy a second home. Now, you have two years from this second home purchase date to decide which one to show as your primary residence.
Again, after a year, you can invest in purchasing a new cottage to spend some splendid vacations.
So, you get another two years from the date of this current purchase to declare any of the three houses as your primary residence.
In this way, you can save the Capital Gains Tax on the property you wish to sell, even if you do not live there at the time of sale.
Flips
You can also go for flipping of the houses. However, in that case, taking appropriate advice from your financial advisor is essential.
Discuss with your consultant to have a better idea on the sale of your second home. They know the tricks of how to reduce the tax burden. Therefore, you can implement the suggestions to pay a lower CGT.
Selling an Inherited Property
An inherited property will count as your second home. Therefore, you must try to sell it off as soon as possible to avoid paying higher taxes.
The tax rate will depend on the increase in the value of the property from the date you inherit it till the date of sale.
Undoubtedly, if you sell it faster, the rates will be lower. Hence, it can be a smart way of saving your taxes by finding a buyer for your inherited property quickly.
A financial expert can of course help you in such matters.
Conclusion
When you are planning to sell your second home in the UK, you have to think about the taxes too. Capital Gains Tax or CGT is applicable on the excess value of the property between the purchase and the sale value. Therefore, it is essential to understand the laws to avoid capital gains tax on such sales.
I hope this guide has provided useful tips to reduce your overall tax burden. However, you can always consult with your financial advisor to ensure a swift yet profitable sale. You can opt for a CGT allowance, go for the flips, sell off an inherited property quickly, or deduct the connected sales expenses from the total tax amount. Enjoy a hassle-free sale with low tax liability.
FAQ
Are all assets taxable in the UK?
No. Some assets in the UK come within the purview of tax-free assets. You do not have to pay tax on the sale of same. However, you can also avoid capital gains tax if the total tax payable is below the tax-free allowance limit.
How can I be sure that I am liable to pay Capital Gains Tax in the UK?
You can consult a financial expert about your Capital Gains position. Capital gains usually arise on the disposal of any personal asset of value £3000 or more. However, your private car does not fall under this category.
What is the current threshold for reporting capital gains?
Currently, the threshold for reporting your capital gains in the UK is £50,000.
