If you are considering selling a second home or investment property then you are likely to incur Capital Gains Tax (CGT) as the sale will not benefit from the Private Residence Relief that is available on the sale of your main home.
Depending on your tax status, this could mean that you face a tax charge of up to 28 per cent on the gains you have made on the property during ownership.
As well as affecting landlords, this tax can also affect those that take possession of a property after a loved one dies, so it is important to understand the potential liabilities you face.
How to calculate a CGT liability on a property sale?
Calculating your CGT liability is fairly simple. All you have to do is deduct the purchase price from the final sale price at completion to calculate the ‘gains’ on the sale of the property.
As part of this equation, you can also include legitimate costs incurred on both the purchase and the sale, which may reduce the amount of gains you achieve.
Once you have figured out your gains you divide it by the rate at which you pay CGT; either 18 per cent for a basic tax rate taxpayer or 28 per cent if you pay tax above the basic rate.
How to reduce your CGT liability on a buy-to-let property
CGT tax-free allowance – Make sure you use your £12,300 tax-free allowance as this cannot be carried forward from one year to the next.
If you have already made use of your tax-free allowance for the current tax year, it is worth considering delaying the sale of a property until the next tax year to enable you to use that year’s tax-free amount.
Joint ownership with a spouse – By having joint ownership of a property, you can combine both your tax-free allowances to a total of £24,600. If your spouse is in a lower tax band this could also influence your final bill.
Legitimate costs – There are certain costs that you can factor into your CGT bill. These are:
- Incidental Costs: including solicitors fees, surveyors’ fees, and estate agent fees
- Stamp Duty Land Tax (SDLT)
- Improvement Work Costs. These are classified as work that enhances the asset
Lettings relief – Since April 2020 the rules around letting relief has changed. However, if you have lived in the property at the same time as your tenants you may still be eligible to reduce the amount of CGT you owe following a sale.
Need tax advice on the sale of a second home or investment property? Please contact your Seymour Taylor representative today or email email@example.com or call 01494 552 100.
This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing on 12 August 2022.