From understanding your annual allowances to deducting costs and transferring ownership, here’s what you need to know about your capital gains tax liabilities and how to minimise them.
Key takeaways
- Capital gains tax is usually only avoidable on the property you’re selling if you own just one home.
- If you have a second home or a buy-to-let property, there are ways to reduce your capital gains tax bill when you decide to sell.
- There are allowances you can claim, and you may be eligible for relief in certain circumstances.
If you’re selling your home or a second property, you’ll need to be aware of capital gains tax. Depending on your financial situation and the profit from the sale, you may need to pay this tax.
Capital gains tax applies to property sales but also to personal possessions worth £6,000 or more (except your car) and stocks and shares. This article focuses on capital gains tax related to property sales, whether it’s your home or a buy-to-let investment.
Knowing the rules can help you reduce your capital gains tax bill by making informed decisions. Here’s what you need to know:
What is capital gains tax?
Capital gains tax applies to the profit made when you dispose of an asset, like a buy-to-let property. Disposing means selling, giving away, swapping, or getting compensation for it.
The profit or “gain” is the difference between what you paid for the asset and what you sold it for. For example, if you bought a property for £450,000 and sold it for £550,000, the gain is £100,000. Capital gains tax is due on this amount, and the exact amount depends on your financial situation and tax bracket.
Sometimes, a market value might be used instead of a sale price, such as when you inherit a property. You can use the government’s calculator to estimate your capital gains tax.
There are special rules for certain situations, like living abroad, selling a lease, or if the property is subject to a compulsory purchase order or part of an estate. Make sure to understand all the variables involved.
Will I pay capital gains tax if I sell my home?
Capital gains tax usually doesn’t apply to your primary residence. It’s more relevant if you own multiple homes or have a buy-to-let property.
You won’t need to pay capital gains tax when selling your home if:
- You have lived in it as your main residence the entire time you’ve owned it.
- You haven’t rented any part of it out or used any part for a business.
- The land your home is on is smaller than 5,000 square metres (just over one acre).
If you do need to pay capital gains tax, it’s charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers. This tax is calculated on the profit made, which is the difference between the purchase price and the selling price.
You also have an annual capital gains allowance, so not all your profit will be taxed. There are additional ways to reduce your capital gains tax bill as well.
How to avoid capital gains tax: a step-by-step guide
While it might not always be possible to avoid capital gains tax when selling your second home or a buy-to-let property, you can make smart choices to minimise it. Here’s what to consider:
1. Make it Your Main Home
One way to avoid capital gains tax is to ensure you only own one home, qualifying for Private Residence Relief. If you own multiple properties and live between them, make sure the one you plan to sell is designated as your primary residence well in advance. You must actually live in the property and be able to prove it. Homes you live in can be nominated for Private Residence Relief by registering to vote there and notifying HMRC. Consider taking independent financial advice before doing this.
2. Deduct Associated Costs
While avoiding capital gains tax entirely may not be possible, you can reduce your bill by deducting relevant costs. Selling costs such as estate agents’ and solicitors’ fees, and the stamp duty you paid when buying the home, can be deducted. You might also be able to deduct the cost of certain home improvements. Consult your financial advisor to confirm what can be deducted from your overall gain.
3. Maximise Your Allowances
The tax-free allowance, currently £3,000 a year, applies to individuals, not properties. If you’re married or in a civil partnership, you can double this amount, allowing you to claim £6,000 off your capital gains tax when selling a property.Â
4. Get the Timing Right
The tax-free allowance resets each year and can’t be rolled over. To make the most of it, consider spreading your capital gains across multiple years. If you have more than one property to sell, do so in different tax years to maximise your allowance. If you’ve used up your Annual Exemption Amount, delay the sale until the following tax year.
5. Gift Your Home to Family
Gifting your home to your partner or children is usually exempt from capital gains tax if it’s your primary residence. However, if it’s a second home or buy-to-let, capital gains tax will apply based on its market value at the time of the gift.
6. Transfer Ownership to a Lower Tax Rate Partner
Capital gains tax rates depend on your financial situation. If you’re a higher rate taxpayer and your partner is a lower earner, transferring ownership of a second home to them could lower the tax bill. However, this might not apply if you’re separated and don’t live together.
7. Check for Partial Relief
If you don’t qualify for full Private Residence Relief, you might still get partial relief. If part of your home was used exclusively for business or rented out, you can get relief for the portion used as your main residence. You get full relief for the years you lived in the home and for the last nine months of ownership, even if you didn’t live there. You might also claim relief if you sell a home provided for a dependent relative.
By understanding and utilising these strategies, you can effectively manage your capital gains tax liability.
FAQs
Can I Avoid Capital Gains Tax on Second Homes?
The short answer is no. However, by understanding the allowances and liabilities, you can avoid paying more tax than necessary.
How Can I Ensure I’m Eligible for Private Residence Relief?
To be eligible for Private Residence Relief, follow these guidelines:
- Business Use: No part of your home should be used exclusively for business.
- Land Size: The property should not have land larger than 5,000 square metres.
- Subletting: You shouldn’t sublet any part of the home.
- Intentions: You didn’t buy the home with the sole intention of making a gain.
- Main Residence: You shouldn’t have another property that can be proven as your main home.
- Residency: You must be resident in the UK for tax purposes.
Can I Get Capital Gains Tax Relief for Business?
You might be entitled to relief if you sell a property used for business. This could reduce or delay the amount of capital gains tax you owe. Check the government website for the latest information.
How long do you have to live in a home to avoid capital gains tax?
Capital Gains Tax on Homes: Understanding Your Options
There’s no simple answer to this question as HMRC provides different criteria.
If you have only one home and it meets the criteria for Private Residence Relief, you won’t have to pay any capital gains tax.Â
If you have more than one home or your circumstances don’t meet the Private Residence Relief criteria, you may still be eligible for partial relief.
Capital Gains Tax Allowance
You pay capital gains tax on profit above an annual threshold, which is currently £3,000 per person. If you co-own a home with a partner or spouse, this doubles to £6,000 as you’re eligible for £3,000 each.
Letting Relief
If you rented out part of your home while you lived there, you may be entitled to Letting Relief. It applies to the portion of the property that was rented out. The relief is the lowest of either:
- The amount of Private Residence Relief you qualify for
- £40,000
- The profit you get from renting out part of your home
The 36-Month Rule
Previously, if you owned one home and were disabled or in long-term residential care, you could get full relief for the last 36 months of ownership. This has changed since 2020, and the exemption period is now nine months.
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