Capital Gains Tax on 2nd Property
Who does this effect, it effects landlords with one or more property’s or where they rent this out on a commercial basis for payment of rent for living there.
individuals who have a second home, but this may not necessary be rented out but for their own use and examples of this may be a cottage in the country or a holiday home abroad (Outside the UK).
For tax purposes this is classed as an investment and Capital Gains Tax Is due on this.
How Does Capital Gains Tax Work
Capital gain tax is when you sell a chargeable asset.
When you sell a property, you need to consider if a potential capital gain event has happened, but this does not include your own personal residence that you live in on a day-to-day basis as this is outside the scope of Capital Gains Tax.
You now have 60 days to inform HM Revenue & Customs that you have sold a property and pay over the capital gains tax liability to them.
You will need to set up a government gateway account and declare the capital gain though the portal and pay over the amount due to the account given via the portal and using the reference given.
Do not use your self-assessment Unique Tax Reference (UTR) as this is no longer a part of self-assessment tax.
You will need to declare this on the capital gains tax pages of your tax return declaring the gains again and if there are any adjustments to gain already the difference will be chargeable or refunded but these adjustments must also be made through the capital gains portal and the amount due on your tax return must come back to zero on your tax return.
Capital Gain Tax Reliefs
There are some tax reliefs that may be available to you when calculating the capital gain:
Private residence relief where you have lived in the property for a period as your home for a period where you have owned the property.
This will include the last 9 months if you have lived the property or not.
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, Private Residence Relief can be claimed. The following deeming periods are available:
- Where an individual works abroad for employment, that period abroad will qualify for relief regardless of the period.
- 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.
- Any period of absence from the property, regardless of the reason, will be able to claim relief for a maximum of three years.
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.
Capital Gain Annual Exempt Amount
From 6th April 2023 all individuals are entitled to a Capital Gains Tax annual exemption of £6,000, and this is subsequently reducing to £3,000 from 6th April 2024.
This amount of 6,000 is included in the calculation of the capital gain and is available to everyone each year and can not be carried forward if not used.
Capital Gains Tax Rates
The capital gains tax rates of 18% / 28% will apply to residential property and carried interest. Any portion of the taxable gain falling within your basic rate tax bracket will be subject to CGT at 18%. Gains exceeding this bracket will be subject to CGT at 28%. Therefore, higher rate and additional rate taxpayers will be subject to CGT at 28% on residential disposals.
Transfer to Spouse or Civil Partner
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 bases. 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.
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.