Having recently introduced the stamp duty surcharge on second homes, the government is also planning changes to capital gains tax. These will come into force in 2020.
Buying a second home has plenty of advantages. It could enhance your lifestyle, generate valuable income and increase your capital. However, the property can see you incurring significant expenses, including maintenance costs, council tax bills, and insurance. You should also be aware of the tax implications, as you could be in for a hefty bill when you sell.
Having recently introduced the stamp duty surcharge on second homes, the government is also planning changes to capital gains tax. These will come into force in 2020. It is important to understand your capital gains tax liabilities and how the proposed changes to the law could affect you.
Capital gains tax
You may have to pay capital gains tax if you make a profit (gain) when you sell a property, which is not your main home. Your gain is the difference between what you paid for the property and the amount you later sell it for. You are permitted to deduct certain expenses from your gain to reduce your tax liability. These include estate agent’s fees, solicitor’s fees and the cost of any improvement work. You cannot deduct the costs of decorating or maintaining the property.
You are also entitled to Private Residence Relief for any time you spent living in the property as well as for the last 18 months you owned the home - even if you weren’t living there at the time. Read more about this relief on the gov.uk
If you are a property developer, rather than a home owner, you do not pay capital gains tax. Instead you pay income tax on your profits, if you are a sole trader. If your business is a limited company, you pay corporation tax.
You may receive tax relief if the property has been occupied by a dependent relative or if it is a business asset. These rules will be changing
in April 2020 as mentioned in the Chancellor’s autumn budget statement in November 2018.
For capital gains tax purposes, second homes include buy-to-let properties, holiday homes, land and inherited properties.
Assessing your capital gains tax liability
In the UK, you pay higher rates of capital gains tax on property than on your other assets. Basic-rate taxpayers currently pay 18% on any gains they make when selling property. Higher and additional-rate taxpayers currently pay higher taxes of 28%.
Fortunately, you do have an annual capital gains tax allowance. This is currently £11,700 and will rise to £12,000 for the 2019/2020 tax year. This cannot be carried forward. In other words, if you don’t use it, you will lose it.
It is crucial to remember that any capital gains that you make in the tax year will be included when working out your personal tax status for that year. This means that your gains from selling a property could push you into a higher tax bracket. If you are a basic-rate tax payer, it is therefore possible that some of your gains will be taxed at the higher rate of 28%.
The government has provided an online capital gains tax calculator
which will help you to assess your liability.
Changes to capital gains tax in 2020
From April 2020, if the proposed new regulations
do come in, you will be obliged to make a payment on account within 30 days of selling a residential property. You will also have to submit a return to HMRC. The payment you make will be credited against your income tax and capital gains tax liability for that tax year.
Capital gains tax for UK non-residents
If you’re a non-resident selling a UK residential property, you only pay UK tax on the gain you’ve made since 5 April 2015.
Selling an overseas property
As a resident in the UK, you are still obliged to pay capital gains tax if the property you are selling is overseas. You may also have to pay tax in the country where you made the gain. If you find yourself the victim of double taxation, you might be able to claim relief. You can usually claim foreign tax credit relief
when you report your overseas income in your annual tax return.
The level of relief you benefit from will depend on the UK’s double-taxation agreement with the country where you made the gain. Even if there is no agreement in place, you will usually still receive relief.
If you inherit your second property
When you inherit an asset, inheritance tax
is usually paid by the estate of the person who has died. You only have to work out if you need to pay
capital gains tax if you later decide to sell the property.
Read more about capital gains tax, and changes to the law on the Which
Taxation can be a minefield and second homes are no exception. If you are in any doubt as to your potential capital gains liability and how to proceed, consult a tax advisor to clarify your situation before investing in or a selling a second home.
If you are thinking of investing in second property in Central London, speak to us at Plaza Estates
for all your property needs.