How capital gains tax works on the sale of a rental property or ‘second home’

In April 2020 some changes were made to the way you pay Capital Gains Tax. Previously, if you had capital gains to pay on the sale of a property, it would be paid by January after the end of the tax year you sold it in. 

Since 6th April if you sell a rental property you’ll need to declare the capital gain to HMRC and pay the estimated tax within 30 days of completion of the sale.

This doesn’t mean you no longer need to declare the capital gain as normal on your tax return, it just means HMRC gets the money in quicker.

Since this is a big change, we thought it’d be a good time to remind you of the basics of capital gains tax – who pays it, when, and what reliefs you may be eligible for to reduce the sum. 

Some of this stuff may seem complicated and jargonny, so bear with us. If there’s anything you want more clarity on, just shout, and we can talk it through with you. 

You may have to pay capital gains tax on a property that isn’t your principal private residence (PPR)

Let’s start with understanding when you’re required to pay capital gains tax on the sale of your property. Capital gains tax (CGT) is a tax on the increased value of an asset – such as a second home – during the time you have owned it. 

So, you may have to pay Capital Gains Tax if you make a profit when you sell (or ‘dispose of’) a property that isn’t your PPR. Your principal private residence (PPR) is just a formal way of saying “your home”.

That includes: 

  • buy-to-let properties
  • business premises
  • land
  • inherited property

The rules are different when you:

  • sell your home (PPR)
  • live abroad
  • are a company registered abroad

To know whether or not you need to pay Capital Gains Tax, you’ll need to work out your gain. Use HMRC’s Capital Gains Tax on UK Property Service online. If you have a self assessment to file for any other reason, you’ll need to include your Capital Gains on your return, even if you’ve already reported and paid them. 

What tax reliefs are available?

You may be able to reduce the amount of capital gains tax you’re required to pay. Here’s a walk through of some of those reliefs: 

Private residence relief 

  • If you’ve lived in your second home at any point you may be eligible for Private Residence Relief. This must have been for a reasonable amount of time (not just 1 week, for example).
  • You can get relief if you’re living away from home for any reason for periods adding up to 3 years (up to 4 years if you have to live away from home for work). 

Letting Relief

If you lived in your home at the same time as your tenants, you may qualify for Letting Relief on the gains you make when you sell the property.

How it works

You pay tax on what’s known as your ‘chargeable gain’. This is your gain minus any Private Residence Relief you qualify for. 

You get full relief for:

  • The amount of years you lived in your home
  • The final 9 months you owned your home (even if you were not living there at the time)

Letting Relief does not cover any proportion of the chargeable gain you make while your home is empty.

Everyone gets a Capital Gains Allowance

This is a personal allowance for capital gains. 

The capital gains tax allowance for 2020-21 is £12,300, increased from £12,000 in 2019-20, though if you don’t make full use of your allowance in the given tax year, you’re unable to carry it forward. 

If you co-own the property with another person, you’ll both get a capital gains allowance, meaning you can effectively double the amount you gain before CGT is due. 

This can feel complicated, get support with your own situation 

Don’t worry if you’re reading through this and it still isn’t crystal clear – there’s a reason we do the job we do! When it comes to paying tax and maximising your reliefs, it can be helpful to talk to us about your unique set of circumstances. We can help you navigate the world of CGT and make sure you’re clear on your position. Tell us all about it here

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