Tax on Purchasing or Selling a Second Home

Many people purchase a second property to let out either for long term lets or furnished holiday lets. Before you start it is important to be aware of the tax implications of owning a second home.

Stamp Duty Land Tax

You pay Stamp Duty Land Tax when you purchase a property or land over a certain value in England and Northern Ireland. If you buy a property as your only main residence, you pay Stamp Duty at the basic rate. If you buy a second home or a buy-to-let property, you pay Stamp Duty at the basic rate plus a 3% surcharge on each band.

You’re liable to pay the surcharge even if the property you currently own is a holiday home abroad and you’re now buying your first property in the UK. It doesn’t matter whether you own a freehold or leasehold, a shared ownership property, or are a joint owner of your previous home – you’ll have to pay additional Stamp Duty on your new one. What’s more, it’s irrelevant whether you actually bought your previous property or were added to the title deeds later on – you technically own a property, therefore any new property you purchase will be a second one.

The Stamp Duty Tax rates for second homes and buy-to-let properties are the same because they both qualify as second residences.

Property Value
Standard SDLT 
Rate 
2019 - 2020
SDLT Rate on 
Second Homes 
or Buy-to-Lets 
2019 - 2020
Up to £125,000 0% 3%
£125,001 – £250,000 2% 5%
£250,001 – £925,000 5% 8%
£925,001 – £1,500,000 10% 13%
From £1,500,001 12% 15%

 

Example

You’re purchasing a second home for £700,000. The maximum rate of Stamp Duty you’ll pay is 8% but this is only for the portion of your property value over £250,000, i.e. £450,000. You pay some Stamp Duty at 3%, some at 5% and some at 8%.

You’ll pay:

  • 3% on the first £125,000 of the £700,000 = £3,750
  • 5% on the next £125,000 of the £700,000 (the portion from £125,001 – £250,000) = £6,250
  • 8% on the final £450,000 of the £700,000 (the portion from £250,001 – £925,000) = £36,000
  • Total SDLT = £46,000

Stamp Duty is the only tax you’ll pay on a second home at the time of purchase. However, you’ll have to pay Council Tax for the period you own the property.

Any other taxes you pay on a second home will depend on what you use the property for and if you sell that property.

If you rent out a second property as a buy-to-let, you may have to pay Income Tax on your rental income. If you sell your second property, you may have to pay Capital Gains Tax.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a UK tax you pay on the profit – or capital gain – you earn from the sale of various chargeable assets, including property or land that’s not your main residence. The amount you pay depends on your personal income and the profit you receive from the sale.

You will pay Capital Gains Tax on:

  • Buy-to-let properties
  • Second homes
  • Land
  • Business premises
  • Inherited properties

You don’t pay Capital Gains Tax on property owned and sold by a limited company; you pay Corporation Tax which currently stands at 19% (2019 – 2020) and is due to fall to 17% in April 2020. This is because any property you own is viewed as part of your business and not a personal investment.

When do you pay Capital Gains Tax?

Capital Gains Tax is payable on property the moment it’s sold. You can report it immediately, but you don’t have to officially pay the money until the 31st January that follows the tax year in which you made your profit.

Example

You sold your property and made capital gains from the sale on 23rd July 2018, within the tax year ranging from 6th April 2018 – 5th April 2019. You must pay your Capital Gains Tax by 31st January 2020 to avoid any interest or penalties for late payment.

How much Capital Gains Tax will I pay?

The amount of CGT you pay on property ultimately depends on two things:

  • The profit you make when you sell your property, i.e. your capital or taxable gains
  • The rates at which you’re charged Capital Gains Tax

HMRC use your personal income to determine the rates at which you’ll pay Capital Gains Tax on property. They add your taxable gains to your income and see which Income Tax band you fall into the year you made your sale. You then pay Capital Gains Tax at the appropriate rates on the portion of your capital gain that’s taxable.

To work out how much Capital Gains Tax you’ll pay on your property, you must first work out your:

  • Total taxable gain, i.e. the profit you’ve made from this investment
  • Taxable gain minus any deductible expenses and the CGT allowance
  • Your tax threshold and therefore the rates at which you’ll pay CGT

How to Work Out Your Total Taxable Gain

You can find your taxable gain if you:

  • Take the amount you sold your property for
  • Deduct the price you paid for that property in the first place
  • The amount left over = total taxable gains or your net profit

You can substitute the current market value for the sale price of your property if you haven’t sold it yet.

Example

  • You purchase a property for £100,000
  • You sell the property for £400,000
  • Your total taxable gain or net profit is: £300,000

We’ll keep using the same example throughout and continue to build on it, so you can see how everything works together.

What Expenses Can You Deduct?

You can deduct certain costs from taxable gains to reduce the Capital Gains Tax you pay on your property, including:

  • Stamp Duty paid when buying the property
  • Estate agents’ fees
  • Solicitors’ fees
  • Costs for improvements to the property, e.g. an extension, kitchen upgrade, etc.
  • Certain other buying and selling costs, e.g. surveyor

You can’t deduct:

  • Costs for the maintenance of the property
  • Mortgage interest

Capital Gains Tax Allowance on Property

The Capital Gains tax allowance on property for 2019-2020 is £12,000. This means you don’t pay any CGT on the first £12,000 you earn from the sale of your property.

Example

Following on from the previous example:

  • Your total taxable gain or net profit is: £300,000
  • Your taxable gains after your allowance is: £300,000 – £12,000 = £288,000

If your total taxable gains are under the Capital Gains Tax allowance, then you don’t need to report them to HMRC or pay CGT.

How to Work Out the Gains You’ll Actually Pay CGT on

To calculate the taxable gains after your expenses and allowance, you:

  • Take your taxable gains
  • Deduct any allowable expenses
  • Deduct the Capital Gains Tax allowance

Example

Following on from the same example:

  • You purchase a property for £100,000
  • You sell the property for £400,000
  • You spent £10,000 on Stamp Duty and agency fees
  • You spent £50,000 improving the property
  • Your total taxable gain or net profit is: £400,000 – £100,000 = £300,000
  • Your taxable gains after your expenses is: £300,000 – (£10,000 + £50,000) = £240,000
  • Your taxable gains after your expenses and allowance is: £240,000 – £12,000 = £228,000

Now you know your taxable gains after your allowable expenses and allowance, you can start to work out the rates at which you’ll pay CGT on your property.

How to Work Out Your CGT Rates

HMRC use your Income Tax band to determine the rates at which you’ll pay Capital Gains Tax. They add your taxable gains to your personal income to see which tax band you fall into the year you made your sale.

The Income Tax rates are:

Income Tax Band Taxable Income 2018 – 2019 Income Tax Rate 2018 – 2019 Taxable Income 2019 – 2020 Income Tax Rate 2019 – 2020
Personal Allowance Up to £11,850 0% Up to £12,500 0%
Basic Rate £11,851 – £46,350 20% £12,501 – £50,000 20%
Higher Rate £46,351 – £150,000 40% £50,001 – £150,000 40%
Additional Rate £150,001 and above 45% £150,001 and above 45%

 

 

The Capital Gains Tax rates on property are:

Taxable Gains on Property 2018 – 2019 Capital Gains
Tax Rate on Property 2018 – 2019
Taxable Gains on Property 2019 – 2020 Capital Gains Tax Rate on Property 2019 – 2020
Up to £11,700 0% Up to £12,000 0%
£11,701 – £46,350 18% £12,001 – £50,000 18%
£46,351 and above 28% £50,001 and above 28%

 

 

Example

Following on from the previous example:

  • You earn £228,000 in taxable gains after any deductible expenses and the CGT allowance
  • Your annual salary is: £45,000
  • Based on your salary only, you’re a basic rate tax payer:
    • You pay 0% Income Tax on the first £12,500 you earn
    • You pay Income Tax at 20% on earnings above £12,500: (£45,000 – £12,500) = £32,500
    • 20% of £32,500 = (£32,500 x 0.2) = £6,500 in Income Tax
    • You pay £6,500 in Income Tax
  • You add your taxable gains to your annual salary to reveal your earnings that year: (£228,000 + £45,000) = £273,000
  • Your new income is above £46,350 and so falls into the higher rate tax band:
    • You pay 18% CGT on the taxable gains above £45,000 and up to £50,000: (£50,000 – £45,000) = £5,000
    • 18% of £5,000 = (£5,000 x 0.18) = £900 in CGT
    • You pay 28% CGT on the taxable gains on the amount above £50,000: (£273,000 – £50,000) = £223,000
    • 28% of £223,000 = (£223,000 x 0.28) = £62,440 in CGT
    • You add these together to reveal the total amount of CGT: (£900 + £62,440) = £63,340 in CGT
    • You pay £63,340 in CGT and £6,500 in Income Tax that year

Available Tax Reliefs

There are certain reliefs that can further reduce the Capital Gains Tax owed on the sale of your property. These are Private Residence Relief and Lettings Relief.

Private Residence Relief

Homeowners who sell their main residence don’t pay any CGT on their property. They receive Private Residence Relief.

You pay Capital Gains Tax when selling property that’s not your main residence, but you may be eligible for some Private Residence Relief if you lived in the property previously. This is known as partial relief.

If you’re selling a property that functioned as your main residence:

  • You don’t pay any CGT for the time you officially lived in that property. You receive Private Residence Relief for that period
  • You don’t pay any CGT for the final 18 months you owned that property, regardless of whether you rented it out or not. You receive Private Residence Relief for those final 18 months

If you’re selling a property that’s registered as your main residence and you let out part of it:

  • You’re eligible for Private Residence Relief for the percentage of the home you occupy, e.g. you live in 60% of the property and let out 40%

The formulas to follow are:

Total gain (£) x (Period you occupy property as main residence in months ÷ Total period of ownership in months)

Total gain (£) x (Period property doesn’t function as your main residence ÷ Total period of ownership in months)

OR

Total gain (£) x Percentage ownership

Example

Following on from the previous example:

  • Your total taxable gain from the sale of a property, before you deduct your allowance and expenses, is: £300,000
  • You bought this property in May 2007 owned it for 144 months (12 years) until May 2019 (May 2007 – May 2019)
  • It was your first main residence
  • You lived in it for the first 12 months that you owned it, from May 2007 – May 2008
  • You moved into another main residence at the end of those 12 months and kept this original property as a holiday home. You never let it out
  • You sell this original property (currently your holiday home) in May 2019
  • You’re exempt from CGT on the final 18 months of ownership
  • Your total occupation in months, including the CGT exemption period is: 12 + 18 = 30
  • You will pay CGT on the remaining months in which the property was unoccupied which are: 144 – 30 = 114
  • You receive Private Residence Relief on:
    • Total gain (£) x (Period you occupy property as main residence in months ÷ Total period of ownership in months)
    • £300,000 x (30 ÷144) = £62,500
  • Your chargeable gain, i.e. the amount you pay CGT on, is:
    • Total gain (£) x (Period property doesn’t function as your main residence ÷ Total period of ownership in months)
    • £300,000 x (114 ÷144) = £237,500
  • You deduct the CGT allowance and any expenses from your chargeable gain (as per the original example):
    • £237,500 – (£10,000 + £50,000) = £177,500
    • £177,500 – £12,000 = £165,500
  •  Then add the amount on which you pay CGT to your personal income:
    • £165,500 + £45,000 = £210,500
  • Your new income is above £50,000 and so falls within the higher rate tax band
    • You pay 18% CGT on the taxable gains above £45,000 and up to £50,000 (£50,000 – £45,000) = £5,000
    • 18% of £5,000 =  (£5,000 x 0.18) = £900 in CGT
    • You pay 28% CGT on the taxable gains above £50,000 (£210,500 – £50,000) = £160,500
    • 28% of £160,500 = (£160,500 x 0.28) = £44,950 in CGT
  • You add these together to reveal the total amount of CGT: (£900 + £44,940) = £45,840 in CGT
    • You pay £45,840 in CGT

The chancellor announced changes to Private Residence Relief in the 2018 Autumn Budget. From April 2020, individuals who sell their previous residence will only receive Private Residence Relief for the final 9 months of ownership, rather than 18 months.

Letting Relief

Letting Relief is only available to landlords selling property in circumstances which meet specific criteria. Letting Relief can reduce the Capital Gains Tax payable on a property by up to £40,000 of tax-free gains.

To qualify you must:

  • Already qualify for partial Private Residence Relief, i.e. you previously lived in the property you’re selling
  • Have let out the property as residential accommodation at some point. You may have let out the whole property or part of it

Currently, individuals can claim the relief on their property even if they haven’t lived there for a long time, but there were some changes announced in the 2018 Autumn Budget. From April 2020, you can only claim Letting Relief if you live there at the time of its sale. You will need to share occupancy with your tenant when you sell the property to be eligible.

The amount of Letting Relief you can claim is the lowest of the following:

  • The same as the amount of Private Residence Relief you’re going to receive
  • £40,000
  • The chargeable gain you make from the letting, i.e. the gain you make for the period you rented out the property

This means that, in addition to the Private Residence Relief you can claim, you’ll also receive Letting Relief. Letting Relief will take the form of one of the above 3 options, whichever is the lowest amount.

Example

The below example is the same as the previous one except that this time, you let out your property for a period after you moved out.

  • You owned a property for 144 months, from May 2007 – May 2019
  • You lived in that property when you first bought it in for 12 months, from May 2007 – May 2008
  • You let out that property for 36 months, from January to 2011 – January 2014
  • It was unoccupied and functioned as a holiday home the rest of the time
  • You’re exempt from CGT on the final 18 months of ownership
  • Your total taxable gain from the sale of your property, before you deduct your allowance and expenses is: £300,000
  • Your total occupation in months, including the CGT exemption period is: 12 + 18 = 30
  • You receive Private Residence Relief on:
    • £300,000 x (30 ÷ 144) = £62,500
  • Your remaining gain, before Letting Relief, i.e. the amount you pay CGT on:
    • £300,000 x (114 ÷ 144) = £237,500
  • The lowest of the following 3 options is: £40,000
    • The same value as your Private Residences Relief: £62,500
    • £40,000
    • The chargeable gain you make from letting:
    • £300,000 x (36 ÷144) = £75,000
  • You receive £62,500 in Private Residence Relief and £40,000 in Letting Relief
  • You pay CGT on your remaining chargeable gain which is: £300,000 – (£62,500 + £40,000) = £197,500

Note: the amount of chargeable gain remaining is before you deduct the CGT allowance or any expenses. You would deduct these and then add the figure to your personal income as shown in the previous examples, to calculate how much Capital Gains Tax you’ll pay.

How do I pay Capital Gains Tax?

You can report Capital Gains Tax in 2 ways:

  • Instantly via HMRC’s “real time” CGT service
  • Annually in a Self-Assessment tax return

If you opt to complete a Self-Assessment tax return, then you must register with HMRC. You also need to report your gain by 31st January in the tax year following the year you sold your property – or the 31st October if you send paper forms.

You can complete a tax return yourself or hire an accountant to fill it out on your behalf.