When you sell a property that is not your main residence, you may have to pay capital gains tax on any profit you make. However, there are exceptions if you meet certain requirements for ownership and use of the property as your main residence. Here is a quick overview of the capital gains tax rules when selling an investment or second property:
Main Residence Exemption
If the property was your main residence for the entire time you owned it, the profit is exempt from capital gains tax. There is no minimum period of time you have to live in the property to qualify for this exemption.
Last 18 Months Rule
If the property was your main residence at some point during your ownership, you can still qualify for an exemption under the last 18 months rule. To meet this requirement:
- You must have occupied the property as your main residence for at least 18 months
- You must not have claimed any other property as your main residence during this period
So if you lived in the property for at least 18 months and no other property was your main residence at the same time, you can sell it tax-free even if you moved out more than 18 months before the sale.
Job-Related Moves
There is an exception if you had to move out of the property for job-related reasons. In this case, the period of absence can be extended beyond 18 months. To qualify, you must meet all of these conditions:
- You occupied the property as your main residence for at least 18 months
- You had to move to a new residence for employment purposes
- You did not claim any other property as your main residence
- You sold the property within 18 months of moving out
Separation or Divorce
If you moved out of the property due to the breakdown of a marriage or other personal relationship, you may still qualify for exemption if you meet these requirements:
- You occupied the property as your main residence at some point
- You sold the property within 18 months of moving out
- No other property became your main residence in the meantime
Disabled Persons or Long-Term Care
There are also exemptions if you had to move to a care facility or another adapted property due to illness or disability. You can sell the property tax-free within 18 months of moving out if:
- You occupied the property as your main residence at some point
- No other property became your main residence after moving out
- You or a spouse were disabled or entered long-term care accommodation
Delays Due to Legal Proceedings
If legal proceedings delayed your ability to sell the property within 18 months of moving out, you can apply to HMRC for additional time to dispose of the property tax-free.
Conclusion
In most cases, you must live in a property for at least 18 months as your main residence to qualify for full capital gains tax exemption when you sell it. Job relocations, divorce, disability, or legal delays can extend this period in certain circumstances. But generally speaking, you need 18 months of occupancy and no claims on other properties during that time to avoid tax on profits when selling an investment or second home.
How to Calculate Capital Gains Tax on a Second Home
If you sell a property that was not your main residence for the entire period you owned it, you may have to pay capital gains tax on any profits from the sale. Here is how to calculate the tax owed on a second home or investment property:
1. Work Out Your Gain
First, you need to figure out the gain you made on the property. This is calculated as:
- Sale price of the property
- Minus purchase price and improvements
- Equals your gain
Keep records of the purchase price, sale price, and any eligible improvements you made that increase the value, such as extensions or renovations. This gives you your taxable gain.
2. Deduct Exempt Periods
You can deduct any periods when the property qualified as your main residence, such as if you lived in it before renting it out. Calculate the gain only for the periods it did not qualify for exemption.
3. Apply Your Tax-Free Allowance
Everyone has an annual capital gains tax allowance, which is currently £12,300 per tax year. Deduct this from your total taxable gain first.
4. Calculate the Tax Due
The remaining gain above your allowance is taxed at either 18% or 28% depending on your overall income and gains for the year. Apply the appropriate rate to work out your final CGT liability.
5. Report and Pay the Tax
You must report and pay any capital gains tax owed to HMRC within 30 days of completing the property sale through a self-assessment tax return.
Keep detailed records to calculate your gain accurately and make use of tax reliefs. With good planning, you may be able to reduce or even eliminate capital gains tax on the sale of a second property.
Capital Gains Tax Rates and Allowances
Capital gains tax (CGT) applies when you sell assets like property or investments at a profit. Here are the current CGT rates and allowances:
Tax Rates
For residential property, the CGT rates for 2023/24 are:
- 18% basic rate on gains up to the basic rate limit
- 28% higher rate on gains above the basic rate limit
For other chargeable assets, the rates are:
- 10% basic rate on gains up to the basic rate limit
- 20% higher rate on gains above the basic rate limit
Tax-Free Allowances
The annual CGT allowance for 2023/24 is £12,300 per individual. This means the first £12,300 of total gains each year are exempt from tax.
For residential property sales, a higher allowance of £24,600 applies when the home was ever occupied by the owner.
Property Surcharge
There is an 8% CGT surcharge on gains from the sale of residential property that does not qualify for a main residence exemption. This means the higher rate is 36% rather than 28% on such disposals.
Carryover on Gains
If your gains exceed the allowance in one tax year, you can carry over unused allowances from the previous year to further reduce your tax liability.
Always check the latest CGT rates and allowances before reporting any taxable gains to HMRC.
How to Reduce Capital Gains Tax on a Second Property
Selling a rental property or second home at a profit usually creates a capital gains tax liability. However, there are ways to potentially lower the tax due on the sale of an additional property:
Claim Main Residence Relief
If you occupied the property as your main home for any period, calculate the gain only on the periods it was not your main residence. You may be exempt from tax on the periods you lived there.
Use Your Annual Exemptions
Deduct your £12,300 annual CGT exemption first before calculating tax on the gain. You can also use a spouse’s allowance if you jointly own the property.
Offset Losses
Offset any losses from other asset sales against the gain to reduce your taxable amount.
Invest via an ISA
Consider transferring some property proceeds into an Individual Savings Account (ISA) to protect future investment returns from further CGT.
Claim Lettings Relief
If you lived in the property before letting it out, you may qualify for up to £40,000 in lettings relief to reduce the gain.
Make Tax-Free Improvements
Adding a conservatory or loft conversion can enhance value and reduce your taxable gain when you come to sell.
Sell in Stages
You could sell part of the land first or lease part of the property to use your annual exemptions each tax year.
Taking some simple tax planning steps can minimise your capital gains tax liability when selling a rental or second property in the UK.
Inheritance Tax Rules for Second Homes
Inheritance tax (IHT) may apply if you gift or leave a second home in your will. Here are the key IHT rules to be aware of:
Potential 40% Tax
IHT is charged at 40% on the value of your estate above the nil-rate band, which is £325,000 per person in 2023/24.
Residence Nil-Rate Band
There is an additional nil-rate band of £175,000 when leaving a home to direct descendants. So a couple can potentially leave a combined £1 million free of IHT.
Lifetime Gifts
Gifting a second home to a child or grandchild may be exempt if you survive 7 years after the gift. The taper relief reduces the IHT if you survive between 3 and 7 years.
Trusts
Putting a second property into trust could help you avoid IHT. But gifts into trust may be liable for 20% exit charges.
Letting Exemption
Letting the property may qualify it for business asset relief of up to 100% from IHT provided it remains occupied.
Spouse Exemption
Leaving a property to a spouse or civil partner is exempt from IHT and the nil-rate bands can transfer on the second death.
With the right planning, it is often possible to pass on a second home to beneficiaries free of inheritance tax through lifetime gifts, trusts, or Will bequests.
Tips for Maximising Profit when Selling a Second Home
Selling a second property or vacation home can provide a significant capital sum if you make the right preparations. Here are some tips to maximise your profit:
Add Value with Upgrades
Minor renovations like a new kitchen or bathroom can significantly boost the property’s value and sale price. But factor in the costs versus the potential gains.
Use a Good Estate Agent
Choose an agent with experience selling similar properties in the local area. They should have the marketing tools and buyer reach to get you the best price.
Set the Right Asking Price
Research recent sold prices for comparable properties and seek advice from your agent. Price it competitively to generate interest but not so low you lose out.
Market It Widely
Utilise both online and offline marketing channels. Your agent should advertise in local media and property portals to attract suitable buyers.
Stage It Attractively
Style the property in neutral tones and declutter before viewings. Kerb appeal is also crucial, so ensure the exterior looks immaculate as well.
Be Flexible on timing
Certain times of year tend to achieve higher sales prices in the property market. You may get a better deal by waiting a few months.
Consider Auctions
If you need a quick sale, a property auction can achieve a successful result although the final price is uncertain.
With careful planning and marketing, you can optimise both the sales price and net proceeds when you sell a rental property, holiday home or other second residence.
Conclusion
Selling a second property can provide a useful capital injection but requires some tax planning and marketing strategies to maximise your profit. By understanding the capital gains tax and inheritance tax rules, making value enhancements, using professionals, and marketing it well, you should be able to achieve an optimal selling price and proceeds after tax.
The key is gaining exemption from capital gains tax by meeting the minimum occupancy rules or qualifying for other reliefs. On inheritance tax, making lifetime gifts or putting the property into trust can also avoid large IHT bills in the future. Do your homework to navigate the tax implications and time the sale when market conditions are favourable.
