Capital gains tax on second homes

In this article we will be focusing on what CGT is, how it is calculated, tax reliefs, utilising the CGT annual exempt amount and reporting requirements.  

HM Revenue & Customs (HMRC) reporting is particularly relevant for individuals selling a residential property in the UK, which is not classified as your only or main residence. 

Keeping up to date with the rules and available reliefs may help mitigate your potential exposure and allow you to plan your tax affairs. 

What is capital gains tax? 

Capital gains tax is assessable when you sell or gift a chargeable asset. This is essentially HMRC’s way of taxing individuals on the profits they make as a result of selling assets which have increased in value since originally purchased or inherited. 

When you sell a chargeable asset a CGT assessment will need to be made for the relevant tax year. Generally, this is calculated to be the difference between sale proceeds the original purchase price, however, guidance on calculating this can be found later in this article or on the HMRC website. 

Where a taxable gain arises, a CGT liability will be payable to HMRC. The rate of capital gains tax will depend on the type of asset that has been sold or gifted, and the date the diposal is made.

Between 6th April 2024 and 29th October 2024, for disposals of residential property a rate of 18% (basic rate taxpayer) and 24% (higher rate taxpayer) will apply, and for disposals of non-residential property (such as shares) a rate of 10% (basic rate taxpayer) and 20% (higher rate taxpaer) will apply.  

From 30th October 2024, for basic rate taxpayers, a rate of 18% will apply to disposals of residential property and other assets. For higher rate taxpayers, a rate of 24% will apply to disposals of residential property and other assets.

The CGT rate for carried interest is 28%, and will increase to 32% from 6th April 2025.

To mitigate a potential liability, certain CGT reliefs can be claimed which can be particularly useful for business sales. For a general HMRC overview click here, alternatively useful information can be found in our guide to capital gains tax for businesses.  

Capital gains tax on property 

When selling residential property, you will need to consider whether a potential gain arising can be mitigated by Private Residence Relief (PRR). PRR is a CGT relief that exempts all or part of a gain arising on the sale of your ‘only or main residence’.  

To enable full relief on the sale of a residential property, the property must be used as your only or main residence throughout ownership. However, the last nine months will be covered by relief regardless, further guidance on this is provided below.  

If a property has not been used as your main residence throughout ownership, PRR is time apportioned to allow relief for periods of actual and deemed occupation.  

Actual occupation is as you expect, the time when you use and live in the property as your main home. There is not a minimum time period for actual occupation, but a test would be whether a reasonable onlooker would assess this to be your main home.  

Deemed occupation is where you are physically absent from the property, but you are treated as living there, because you meet the necessary qualifying deeming period conditions. 

Provided the qualifying deemed periods are preceded and followed by actual occupation, PRR can be claimed. The following deeming periods are available:  

1. Where an individual works abroad for employment, that period abroad will qualify for relief regardless of the period of time. 
2. Individuals that are employed or self-employed required to work elsewhere in the UK will be able to claim up to a maximum of four years for deemed occupation. 
3. Any period of absence from the property, regardless of the reason, will be able to claim relief for a maximum of three years. 

More guidance on these conditions can be found on the HMRC website.  

As highlighted, another period of time that will also qualify for PRR is the last nine months of ownership. This deemed period will be available provided the property has been your main home at some point during ownership. However, in circumstances where a disabled individual or a long-term resident in a care home sells their main home this period is extended to 36 months. HMRC guidance on the final periods of exemption can be found here.  

These PRR conditions apply to properties with garden and grounds within ½ hectare, caution will be needed on PRR claims that exceed this. However, HMRC will permit claims exceeding this provided the area is required for the ‘reasonable enjoyment’ of the property. Claims therefore need to be made on a case-by-case basis.  

Another condition to be aware of is that for spouses and civil partners living together, they may only one qualifying main residence at any time. This means that spouses owning more than one residence may need to confirm to HMRC which of their properties is their main home. To confirm which property is the main residence, a nomination can be made to HMRC. This nomination must be made in writing and within two years from the date you have a new combination of residences.  

Without an election, HMRC will be in the position of determining which property is your main residence based on several factors, for example:  

• Where your family lives  
• Where you work  
• Where you are registered to vote 
• Your correspondence address with HMRC, doctors and banks for example 
• The registered address for your car  
• Where your belongings are kept  
• The address which you use as your main address for council tax purposes 

This is not a definitive list so to avoid any confusion, a nomination should be made if necessary.  

As highlighted, PRR is available to properties which are deemed to be the family home. This means that PRR is not available on buy-to-let properties or business premises such as furnished holiday lets, land and inherited property not used as your main home.  

For individuals who live abroad separate rules will need to be considered and specialist advice should be sought.  

Furthermore, where you only get partial PRR relief, you may be entitled to a further CGT relief which is known as ‘lettings relief’. This further relief is only due when you sell a home which at some point qualified as your main residence and part of the home has been rented out as a residential let at the same time, while you also occupied the property. Letting relief no longer applies where the whole of the dwelling house was let for a time. 

How much is capital gains tax on a second property? 

Once you have calculated your chargeable gain, you must deduct any capital losses arising in the current tax year. The gain can be further reduced by any capital losses brought forward from previous tax years but only as far as to ensure utilisation of your CGT annual exempt amount.  

From 6th April 2024, all individuals are entitled to a CGT annual exemption of £3,000.

Once your taxable gain or loss has been calculated you will be able to establish the CGT liability and what reporting is required. 

As highlighted, between 6th April 2024 and 29th October 2024, and from 30th October 2024, the capital gains tax rates of 18% / 24% will apply to residential property. Any portion of the taxable gain falling within your basic rate tax bracket will be subject to CGT at 18% for residential properties. Gains exceeding this bracket will be subject to CGT at 24%. Therefore, higher rate and additional rate taxpayers will be subject to CGT at 24% on residential disposals.

For reporting purposes, if you are a UK tax resident disposing of UK residential property and have a CGT liability a ‘60 day’ CGT return will need to be submitted. The CGT return is a separate from the self-assessment tax return so two submissions maybe required for the year.  

For non-residents selling UK residential property, CGT returns have been in legislation since 6th April 2015. CGT returns must be submitted within 60 days of completion and for non-UK residents a CGT return is required regardless of whether or not a liability is payable.  

For disposals of UK residential properties by non-UK residents who owned the residential property before 6th April 2015, the standard approach for calculating the gain is to use the market value as of 5th April 2015 instead of using the actual cost of buying the property. You should also be aware that non-UK residents are subject to UK capital gains tax on capital gains arising from direct or indirect disposals of all types of UK land and property as well as interests in UK property rich entities from 6th April 2019. Because these reporting and calculation rules can be extremely complicated, professional advice should be considered.

For HMRC guidance on UK resident disposals click here, and for non-resident guidance more can be found here.  

When not to pay capital gains tax on a second home 

There are some instances where a property disposal may not incur a CGT liability.

If you transfer an interest in a property to your spouse or civil partner who you have not separated from, this will not create a CGT liability. This is because of the special CGT rules that apply to spouses and civil partners on transfers of capital assets. These transactions will take place on a ‘no gain no loss basis’. As a result, the asset transfers across to the spouse or civil partner at the original base cost. Of course, on the eventual sale CGT will be assessable.  

Special rules also apply in instances where a spouse or civil partners are separating. HMRC guidance in this scenario can be found here. 

In rare circumstances, dependent relative relief can also be considered on the sale of a residential property. As suggested, this is available in very few circumstances with specific conditions being applied. In short, it is necessary for the dependent relative to have occupied the property at some point between 1st April 1982 and 5th April 1988. In addition, there are various complexities to consider before a claim can be made and HMRC guidance can be found here 

Potentially with planning and advice, tax can be mitigated on the sale of a second home. Therefore, speaking with your accountant before a property sale will provide you with this reassurance.  

What can I deduct from the tax? 

To establish whether a CGT liability is payable your starting point is calculating your chargeable gain/loss on the sale of the chargeable asset. To calculate this, you will need to use the following pro forma:

	£	£
Gross sale proceeds	X
Less costs of sale (note 1)	(X)
Net sale proceeds		X
Less: original purchase price or market value at 31/03/1982	(X)
Less: costs of purchase (Note 2)	(X)
Less: costs of enhancing the property (Note 3)	(X)
		X
Net gain / loss	X /	X
Less: Private Residence Relief (Note 4)	(X)
Chargeable gain / loss	X
Less: Current year and/or previous year capital losses (Note 5)	(X)
Less: Current year CGT Annual Exempt Amount (Note 6)	(X)
Taxable gain	X

Note 1: These include costs directly relating to the sale of the property, such as solicitor fees and estate agent fees. HMRC guidance regarding other expenditure that can be deducted can be found here.  

Note 2: These include costs directly relating to the purchase of the property, such as solicitor fees, estate agent fees and stamp duty land tax. HMRC guidance regarding other expenditure that can be deducted can be found here. 

Note 3: HMRC guidance regarding the necessary criteria on enhancement expenditure can be found here.  

Note 4: PRR will potentially be available on the sale of a residential property which at some point has been used as your ‘only or main residence’.  

Note 5: Any current year capital losses will be automatically deducted against any gains arising in the same tax year. Any capital losses which have arisen from a previous tax year can be deducted tax-efficiently to utilise the CGT annual exempt amount. HMRC guidance on capital losses can be found here.  

Note 6: From 6th April 2024, individuals are entitled to CGT annual exempt amount of £3,000. HMRC guidance on the appropriate rates can be found here.  

If a taxable gain has arisen, a CGT liability can be calculated using the applicable rates.

For sales of assets which have suffered overseas tax, specialist advice should be sought to consider whether double tax relief can be utilised. A list of the double tax treaties for the UK can be found here.  

Other second home taxes 

Alongside CGT, property owners need to be aware of the other taxes that may arise during ownership:  

Stamp Taxes – when property is purchased stamp tax will be assessable. This will be payable 14 days after the ‘effective’ transaction date. The location of your purchased property will alter the tax that is payable:

• SDLT applies to England and Northern Ireland  
• Land and Buildings Transaction Tax applies to Scotland  
• Land Transaction Tax applies to Wales  

Council tax – property owners will need to be aware of any council tax liability that may be payable. Guidance on your council tax band can be found here.   

Income tax and National Insurance Contributions (NICs) – individuals or businesses letting land or property out will need to consider whether income tax and/or NICs has arisen for a relevant tax year. An assessment for self-assessment will duly need to be completed. For further guidance, click here to see our article on ‘How much is tax on rental income?’ 

Inheritance tax (IHT) – should you decide to gift an interest in a property during lifetime or if you own property on death, IHT needs to be considered. Our guide in the above link provides a summary of the lifetime and death tax implications to be aware of. Of course, should you require any assistance with IHT planning please get in touch. 

How TaxAssist Accountants can help

At TaxAssist Accountants, we have years of experience dealing with property owners, helping individuals and businesses stay up to date with the necessary CGT compliance and advice. Call us on 01463 242 667 or contact our team today to find out more about the tax advice and support we offer.

Last updated: 31st October 2024