Capital Gains Tax on second homes

In recent years, many people have invested in property in addition to, or instead of, a traditional pension. This has led to a significant increase in second home ownership. These properties will often be let out to tenants, used as a holiday let or a second home. In all cases, the owners of such property must be careful that they do not fall into a tax trap.

Capital Gains Tax (CGT) is a tax on the profit when someone sells or disposes of an asset that has increased in value. The gain is potentially taxable, not the amount of money received. Disposing of an asset includes selling it, giving it away as a gift or swapping it for something else.

As with most taxes, there are important exemptions and reliefs which can apply to decrease the amount of tax payable or, in some cases, result in no tax being payable at all. One of the most important reliefs is the private residence relief. This means that a person does not pay CGT when they sell their home if all the following apply:

  • they have one home and have lived in as their main home for their entire period of ownership
  • they have not let part of it out
  • they have not used part of their home exclusively for business purposes
  • the grounds, including all buildings, are less than 500m² in total
  • the property was not purchased just to make a gain.

The private residence relief does not apply to the sale of property, which is not the seller's home, for example, a buy to let property.

Even if the sale of such property had made a gain, taxpayers used to have a reasonable amount of time to report the gain and pay any tax due. However, this deadline was dramatically reduced in 2020. In the recent budget, the Chancellor extended the deadline by which CGT must be reported and any tax paid, but the timeframe is still tight. The deadlines for reporting and paying any tax due on UK residential property are now as follows:

  • within 60 days of selling the property if the completion date was on or after 27 October 2021
  • within 30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021.

Taxpayers should remember that they may have to pay interest and a penalty if they do not report and pay on time.

To discuss this or any other property related issue, contact us.

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