Capital Gains Tax on a Second Home

A guide to understanding and paying capital gains tax on second homes

The rules regarding paying capital gains tax on a second home in the UK have changed dramatically over the last few years. The amount you could be eligible to pay, as well as your tax free allowance and the timeframe in which you have to pay your capital gains tax have all been recently updated.

This guide from UWM Accountants provides a clear, jargon-free introduction to capital gains tax on second homes in the UK. With it, you will be able to easily determine what you could be due following the sale or transfer of your additional property, as well as how to minimise the tax you pay whilst maximising your capital gains.

An Introduction to Capital Gains Tax: How It Works

Capital gains tax is a tax UK residents are obligated to pay on profit (known as ‘gains’) made following the ‘disposal’ of ‘chargeable assets’ worth more than £6,000, including:

• Properties which are not your main home
• Shares outwith an ISA or PEP
• Business assets
• Material goods like artworks

For example, if you were to purchase a second home at the value of £280,000 and dispose of it later at a value of £350,000, then your ‘gains’ would be £70,000. HMRC would require you to pay capital gains tax on this £70,000.

There are however certain allowances and exemptions to capital gains tax which can help you to reduce the proportion of your gains which are eligible for tax. We’ll explore these avenues a little later in the article.

The types of properties which qualify for capital gains tax

A ‘second home’ can be defined a few different ways in the eyes of HMRC. As such, it’s worth knowing exactly what types of properties qualify for capital gains tax.

• A second home which is not your main place of residence, e.g., a holiday home
• A buy-to-let or buy-to-rent property which you are the landlord of
• A business premises
• A plot of land
• A second home or property which you inherit (capital gains on inheritance only apply if and when you ‘dispose’ of the inheritance)

In the interests of this article, we’ll be examining capital gains tax only on those properties listed above which would be deemed a ‘second home’ – i.e., not a business premises or plot of land.

What counts as the disposal of an asset

You pay tax on the capital gains made through the ‘disposal’ of your second home, but what exactly counts as ‘disposal’? This is an umbrella term which HRMC uses to cover a range of asset interactions over and above a simple sale. Disposal of a second home includes:

• The sale of the property to a third-party
• The transfer of the property to a third-party, including to a family member who is not your spouse or civil partner
• The gift of the property to a third-party who is not your spouse or civil partner
• The exchange of the property for another chargeable asset
• The receipt of compensation for the loss or destruction of the property, e.g., through an insurance claim

Capital gains tax rates: Working out what you could be due

Not everyone is obligated to pay the same amount of capital gains tax on the disposal of their second home. The amount of tax you pay depends instead on your income tax bracket and the size of your gain.

For higher and additional rate taxpayers (those who earn over £50,271 per year), the rate of capital gains tax is a clear-cut 28%, owed on any gains made from the sale of a second residential property after allowances and exemptions are applied.

Note: There is an 8% capital gains tax (CGT) surcharge on the disposal of residential property, meaning that the higher CGT rate of 20% for other chargeable assets becomes 28% for second homes.

For basic rate taxpayers (who earn below £50,271 per year), however, determining the rate of capital gains tax is a little more complex. Below, we’ve outlined the steps to follow for working out what capital gains tax you could be due as a basic rate taxpayer.

1. Determine your taxable income: the amount you make in a year minus your personal allowance of £12,570
   1. For example, £30,000 – £12,570 = £17,430
2. Determine your taxable gains: the amount of profit you made from the disposal of your second home, after allowances and exemptions are applied
   1. For example, £40,000 in gains
3. Add your taxable income to your taxable gains: your taxable gains are viewed as income by HMRC and so must be counted as part of your taxable income
   1. For example, £17,430 + £40,000 = £57,430
4. Work out which amount of your capital gains falls in which bracket: you will pay a basic CGT rate of 18% on your gains up to the higher-rate threshold of £50,271; you will pay the higher CGT rate of 28% on any gains over the threshold
   1. For example, capital gains on a second home of £40,000 – on top of a taxable income of £17,430 – puts £32,841 of your gains below the threshold and £7,159 above the threshold
   1. In this example scenario, you would be eligible to pay 18% capital gains tax on £32,841 and 28% on £7,159 = £5,911.38 + £2,004.52 = £7,915.90

Recent Changes to Capital Gains Tax Law in the UK

Even those who have previously had to pay capital gains tax on the disposal of a chargeable asset, including a second home, will benefit from a refresher course. This is because the UK has recently changed several of the rules governing how capital gains tax must be paid on second homes.

The first major change is that you must now declare and pay capital gains tax on second homes within 60 days of the disposal. Previously, CGT was declared and paid on your financial year-end tax return, but this is no longer the case.

The other major change is to the tax-free capital gains allowance which the government affords each individual. From 2018 until 2023 this allowance rose or stayed steady at around £12,000. In the tax year 2022-2023, the tax-free allowance on capital gains was £12,300. However, as of the tax year 2023-2024, the allowance has been more than halved to £6,000.

Capital Gains Tax Exemptions and Allowances

There are a number of exemptions and allowances which you can apply to the gains you make on the disposal of your second home in order to reduce the overall taxable amount.

We’ve already discussed the current tax-free allowance of £6,000 per person. For example,  if you were to sell your second home for £50,000 profit, then you would apply this allowance before paying CGT, making your total taxable gains £44,000.

However, there are other ways to reduce this amount even further. You may also be able to deduct:

• Fees incurred by estate agents and solicitors
• The stamp duty you paid when you first bought your second home
• Costs of surveying and/or valuation carried out by an accredited surveyor, auctioneer or valuer
• Costs of advertising your second home for sale
• Costs linked to renovation work which helped to increase the value of your home, e.g., building costs for an extension
• Some accountancy fees, provided they are directly linked to the disposal of the house

Furthermore, you may also be able to reduce the capital gains tax you owe on your second home by exploring these additional avenues:

• If your second home is jointly owned, then both owners will be able to put their tax-free capital gains allowance toward the total taxable gains from the disposal
  • Note: Both parties must declare capital gains tax independently, and only on their portion of the profit
• If you legally declare your second home as your ‘primary residence’ within two years of purchasing it, you are exempt from capital gains tax under something called ‘Private Residence Relief,’ or PRR
  • Note: You must ‘nominate’ your main residence to HMRC within two years of purchase and be able to prove the validity of this nomination. This route is typically only useful for reducing your taxable capital gains where your second home is of greater value to your initial place of residency, or you forecast making greater gains from it in future.

Paying an Additional Capital Gains Tax on a Second Home Overseas

If you own an additional home overseas, which is not your main place of residence, then you may be obligated to pay capital gains tax both in the UK and in the overseas country. You may be able to claim some of this tax back, but we strongly advise you seek the help of a professional accountant if you find yourself in this predicament.

How to Pay Your Capital Gains Tax Bill

Once you’ve determined your total taxable capital gains on a second home by deducting all applicable allowances and exemptions, you must declare and pay tax on these gains to HMRC within 60 days of the sale or ‘disposal.’

The easiest way to do so is through the Government Gateway HMRC online portal, but first, we recommend gathering all of the information which the declaration form will ask you for.

• The address and postcode of your second home
• The date you purchased or received the second home
• The date you exchanged contracts during the disposal of your second home
• The date you stopped being the owner of the second home (i.e., the completion date)
• The value of the second home when you purchased or received it
• The value of the second home when you disposed of it
• The total costs of buying, selling, or renovating your second home to improve it
• The details of any tax reliefs, allowances or exemptions which you are entitled to claim

Once you have these details to hand, proceed to fill out the online form via the link above.

Making the Most of Your Capital Gains with UWM Accountants

We hope that this guide to capital gains on second homes has prepared you to dispose of chargeable assets with confidence in what you can claim tax-free, and what you will be obligated to pay tax on.

Of course, not everyone has the time nor know-how to truly make the most out of their capital gains allowances, and the process of calculating and paying capital gains tax on a second home can be complex, even stressful.

To be sure that you’re paying only what you absolutely need to on the capital gains from your second home, contact UWM Accountants for some friendly and expert advice.