Thousands of second-home owners are predicted to hang up the keys to their investment properties following new rules which will strip them of their tax relief.
But what a lot of home-owners don’t know, or are unsure of, is how Capital Gains Tax (CGT) will impact on the sale of their property.
CGT is a tax on profit when you sell – or “dispose of” – an asset that has increased in value. It is only the gain you make that is taxed, rather than the sale of the property.
The tax is activated on the sale of most personal possessions worth £6,000 or more and property that is not your main home (meaning you have not been living in it).
Fortunately, everyone is entitled to a tax-free Capital Gains allowance. As of April 2016, this is set at £5,550 for trusts, and £11,100 for everyone else.
All gains exceeding this allowance are taxable at 18 per cent for a basic-rate taxpayer or 28 per cent for a higher or additional rate taxpayer.
You bought your second home for £200,000 in 2010. You have let it out for six years, but you now wish to sell it. You find a buyer for your house and sell it for £240,000. Your Capital Gains currently sits at a hefty £40,000.
Assuming you have used £0 of your CGT allowance, you can subtract £11,100 from the £40,000 taxable gains. You now only have to pay CGT on £28,900.
Assuming you are a basic-rate taxpayer, £5,202 will be deducted at a rate of 18 per cent CGT.
Not accounting for estate agent, legal and Stamp Duty fees, this means the effective sale of your house is now worth £234,698 (£200,000 for the initial investment, plus £11,100 allowance, plus £28,900 taxable gains, minus £5,202 in CGT).
We can help
Are you considering the sale of your second home? Did you know that Capital Gains can push you into a higher income tax band, or that you can gift properties free of CGT to your wife, husband or civil partner? At JW Hinks, our Lifestyle Services team can provide you with comprehensive advice on all tax matters, including Capital Gains Tax. Contact us today for more information.