Owning a second home - the tax implications of buying and selling

There have been a number of changes in the last few years which have an implication on buying or selling a second property in the UK. This applies to property which is not your main residence but an investment or holiday property.

Consultation on Capital Gains Tax

In April, HMRC published a consultation on a proposed capital gains tax payment on account scheme for residential property gains.

What is Capital Gains Tax?

Capital gains tax is a tax on the profit when you sell an ‘asset’ that has increased in value. The amount of “gain” you make is taxed, not the full amount of money that you receive.

For example, if you buy a shareholding for £5,000 and later sell it for £15,000, you made a gain of £10,000.

Some assets are tax free and you also do not have to pay capital gains tax if all your chargeable gains in a year are under your annual allowance. The most obvious asset that this applies to is property. It does not apply to a home that is your main residence, but capital gains tax will be relevant for any type of investment property that you own.

What is likely to change with capital gains tax?

From April 2020, if the proposed new regulations come in, a payment on account must be made within 30 days of disposal of a residential property and a return submitted to HMRC. The payment will be credited against the taxpayer's income tax and capital gains tax liability for that tax year.

The measure was first announced by the government as part of the 2015 Autumn Statement. The government announced its deferral to April 2020 in the Autumn 2017 Budget.

Disposing of a second home or rental property

Lee Young, Partner and Wills & Tax Solicitor, says “The changes will mainly affect those disposing of a second home or a rental property. They will not apply where the gains are not chargeable to capital gains tax. As this can be a complicated issue to grapple with, it makes sense to engage a law firm which has both property and tax specialists, who can handle both matters at the same time. At Frettens, I specialise in advising clients on the tax implications and I work closely with my Conveyancing Teams in Ringwood and in Christchurch to offer a seamless service to our clients.”

Key anticipated features of the scheme include:

  • In calculating the gain, chargeable gains relating to non-residential property assets are ignored; unused losses, available reliefs and the annual exempt amount are taken into account as normal.
  • The rules will apply to disposals of overseas property, unless it is expected either that the gain will be taxed in another country and double tax relief available, or the gains will be taxed on the remittance basis.

The definition of residential property for capital gains tax purposes will not change.

The government will publish a response later this year along with draft legislation that will be introduced in the Finance Bill 2019.

Buying a second home or rental property

In 2016, an increase in Stamp Duty Land Tax was introduced, meaning you have to pay an extra 3% above the standard rates of SDLT if you are buying an additional property.

Higher rate Stamp Duty Land Tax

Like ordinary Stamp Duty Land Tax (charged on your home), the tax owed is calculated on a tiered basis based on the property value. Where the property is not your primary residence, an additional 3% is due on each tier.

Michelle Petersen, Conveyancing Associate, comments “Since this higher rate was introduced, a number of clients have been surprised to understand how the rules work and who qualifies for the higher rate of SDLT. It can be especially complicated when two people are involved in buying a property.”

In providing a quote, solicitors now have to take more details to ensure that the quote is accurate. At Frettens, we ensure that our quotes are clear to follow and include all relevant charges so there are no hidden costs.

Michelle adds “We are often the bearer of bad news when explaining how these rules work. It is a tricky piece of legislation and has caught many people out as they do not anticipate the thousands of pounds they now need to pay in tax to purchase an additional property. Please call us for a quote – we are happy to discuss your circumstances in full and to clarify what exact rate of SDLT you must pay.”

We produced an article last year which explains the higher rate stamp duty costs, which is useful to read if this affects you. When must you pay the higher rate of Stamp Duty Land Tax?

 

Our Wills & Tax Team and our Conveyancing Team are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.

If you have any questions, you only have to ask us at Frettens. Please call 01425 610100 and Lee, Michelle or a member of the team will be happy to chat about your situation and your particular requirements.