For owners of multiple properties, it’s important to understand the tax liabilities that arise on the disposal of residential property assets. But the rules for capital gains tax on a second property can seem daunting, not least because the capital gains rules differ between your main home and any additional properties you own.
Where the property is your main or only residence, tax is not usually payable on gains under ‘Principle Private Residence Relief’ (PPR), where you have lived there throughout its ownership.
Capital gains tax is however payable on any additional properties you own and dispose of at a gain. This includes rental properties, second homes and holiday lets.
So, whether you are a professional ‘portfolio landlord’, a foreign investor with interests in the UK property market or even an ‘accidental’ landlord who has inherited a second property, if you are considering disposing of a property that is not your primary UK residence, here is what you need to know about the capital gains tax on second property.
Capital gains tax is payable when you dispose of an asset – in this instance we will focus on property – at a profit.
The gain is calculated by deducting from the sale price the initial price the property was acquired for, less any permissible costs and less the capital gains tax annual exemption where applicable.
Permissible costs may include:
- Stamp duty
- Solicitor’s fees
- Estate agent’s fees
- Costs involved in advertising the property for sale
- Costs incurred in increasing the property’s value (improvements, not maintenance or general upkeep costs)
For each tax year each taxpayer is granted capital gains tax annual exemption. For the year 2020/21, it is £12,300. So, you can take the first £12,300 of your annual gains tax-free.
If your gain on the sale of a second property exceeds the annual exemption, or if you have utilised the exemption on the disposal of another asset within the qualifying 12 month period, you will be liable to pay capital gains tax on the outstanding gain at one of the following rates:
- 18% capital gains tax if you are a basic rate taxpayer
- 28% capital gains tax if you are a higher rate taxpayer
You should note that although capital gains tax rates were generally reduced to 10% / 20% respectively, this reduction does not apply to UK residential property.
Tax reliefs are available for second properties, where relevant criteria are met.
Principle Private Residence Relief (“PPR”)
Under PPR Relief, you won’t pay any tax on selling your property – provided it is or has at some point during your ownership been, or been deemed to be, your primary residence.
If you own multiple properties, you are permitted to nominate one of the properties as your primary residence to benefit from this tax-free relief.
You have two years from the point you purchase a new property to change your main residence.
The property does not have to be the one where you live most of the time. You may wish to consider nominating the property expected to make the largest gain when you come to sell.
You should however expect HMRC to request further information to support your case to change primary residence. There has been a great deal of activity from HMRC in this area in recent times.
Married couples and civil partners should note that they can have only one main residence between them.
Note that you won’t be able to claim tax relief if you bought the property just to sell it on and make a gain.
If the property qualifies in part for main residence relief and it has also been let during the period of your ownership, you may be able to claim lettings relief to reduce your capital gains tax bill.
The amount of lettings relief available is the lower of:
- the amount of the main residence relief due;
- the amount of the gain that relates to the period of letting; or
You can claim private residence relief and letting relief on the same property. However – you are not allowed to claim the two forms of relief for the same period of time.
For example, the last 18 months will qualify for private residence relief rather than letting relief. The exact amount of private residence relief and letting relief you can get depends on the specific fact pattern.
If you inherit a second property, there may be inheritance tax to pay, but this will usually be dealt with by the estate of the deceased. However, for capital gains tax purposes you will be deemed to have acquired the property at the probate value.
If you subsequently decide to sell the inherited property, there are a number of factors which will dictate if and what capital gains tax you are liable for.
If you sell the inherited property and PPR relief is not available as the property had at no point been your main residence, capital gains tax will be payable at the prevailing rate.
The gains will be calculated as the difference between the value of the property at sale and the value of the property at probate, less any allowable costs of selling.
If you were gifted the property while the previous owner was still alive and still living in the property, then you may also have to pay capital gains tax when you eventually sell the home. The amount will be based on the increase in value between the date they gave you the property (not the date of their death) and the date you sell. Importantly – this is the case even though there may also be inheritance tax to pay on the home at the time of death.
Prior to 5 April 2015, no capital gains tax was payable by non-UK residents owning UK property.
Since 5 April 2015, non-UK residents have been subject to capital gains tax on the disposal of UK residential property.
Under the current rules, if the property was owned before 6 April 2015, the gain arising is calculated for all intents and purposes as if you acquired the property on 6 April 2015 at its then market value.
Non-UK residents must notify HMRC of the disposal of UK residential property within 30 days of the completion of the sale or within 30 days of any other transaction, e.g. a gift, and you will usually be liable to pay the capital gains tax within the 30-day period.
Broadly speaking, an FHL is a furnished residential property located in the UK or the European Economic Area (“EEA”), let on short-term periods and available for let for at least 210 days, and actually let for 105 days, in a given tax year.
Where the total of all lettings that exceed 31 consecutive days is more than 155 days during the tax year, the property will fail to qualify as an FHL. The FHL must also be let on commercial terms.
All UK residential properties which are let under the FHL provisions will form a UK FHL business whilst any EEA residential properties will form an overseas FHL business.
FHL properties are treated as business assets for certain capital gains tax rules and benefit from numerous capital gains tax reliefs which would otherwise be unavailable in respect of residential property.
Two of the main capital gains tax reliefs that apply are:
- Roll-over relief: Where an FHL is sold and the proceeds reinvested in qualifying business assets, the capital gain may be deferred until the new asset is sold; and
- Entrepreneurs Relief (“ER”): Where there is a material disposal of business assets one may benefit from the ER capital gains tax rate of 10% (subject to the ER lifetime limit of £10 million).
Property owners, landlords and investors, both UK and non-resident can benefit from tax planning, identifying all tax liabilities and available reliefs including capital gains tax and property related taxation.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.