Selling a Second Property Tax-Efficiently

So what are the tax implications on selling your second property, and how can you make the sale more efficient?

Capital Gains Tax (CGT) on Selling Your Property
When you sell your second property, the tax implications are as follows:

• The gain on the disposal is calculated as the sale price minus the purchase price, deducting any costs or fees.
• If you give away the property or sell it for less than it is worth, the market value is used. This means that you cannot escape CGT by gifting the property.
• Everyone has an annual exemption of £12,300 (2021/2022) to set against gains. You will only pay CGT on gains above this amount.
• The rates of CGT on property are:
  • 18% for a basic rate taxpayer
  • 28% for a higher or additional rate taxpayer
• If the gain pushes your income over the higher rate tax threshold, the gain will be taxed partly at 18% and partly at 28%.
• You need to report and pay any CGT due within 60 days of the sale. For any properties sold before October 2021, the deadline is 30 days.
• The tax rates on residential property are higher than the rates on other assets. If you sell investments, the rates of tax are 10% and 20% respectively.

Maximising Exemptions
Any transfers of assets between spouses are ignored for CGT purposes.

This means that if you transfer the property into joint names, you will have two exemptions to set against the gain (£24,600 in total). This can save up to £6,888 in CGT.

Another option is to transfer the property to a lower-earning spouse. This means that more of the gain will be taxed at 18% rather than 28%.

The acquisition cost will still be the price you paid originally, not the price at the time you transferred ownership.

Of course, there will normally be a cost for changing the ownership of the property, so this needs to be weighed up against the potential tax saving.

Claiming Expenses
There are a number of expenses you can claim to reduce your gain for CGT purposes. For example:

• Renovation costs to put the property into a habitable condition.
• Solicitor’s fees.
• Estate agent costs.
• Surveys.

You cannot claim routine maintenance, decoration or mortgage interest costs, although if you have rented out the property, you can normally set these items against income tax.

Private Residence Relief
Your main residence is exempt from CGT.

If you lived in the property at any time, you can claim a proportionate reduction in your CGT liability for the period in which you lived there, plus the last nine months of ownership.

For example, if you have owned the property for ten years, but lived there for five, your gain would be more than halved.

When you buy a second property, you have two years to decide whether to elect it as your main residence. So if you bought the property relatively recently, and are planning on spending a lot of time there, it might be worth appointing it as your main home. The decision will depend on the value of your properties and which one you are likely to sell sooner. You can only select one property at a time.

Setting Losses Against Gains
You can use capital losses to reduce your CGT bill, even if they were created in an earlier tax year.

If you have sold underperforming investments, you can set the losses against the gains on your property.

If you own shares or funds which are worth less than you have paid for them, you can sell them now to lock in the loss and reduce your potential CGT liability. You can then reinvest the proceeds in assets which will hopefully produce better performance.

Losses can be carried forward indefinitely until they are fully offset by gains.

Reinvesting the Proceeds
You can defer your CGT liability by investing some of your gain in certain types of investment.

An Enterprise Investment Scheme (EIS) allows you to invest in smaller, or early stage companies. Not only can you defer your CGT bill, but you can also claim relief from Income Tax and Inheritance Tax. Gains on the EIS itself are free of CGT.

You need to hold the investment for at least three years, otherwise the reliefs will be lost.

Theoretically, the original gain will become taxable when you sell the EIS, but these investments are long-term tax planning strategies which many investors keep, or roll over into new qualifying investments, for life. This means that the gain can be deferred indefinitely, and eventually wiped out on death.

Of course, the catch for these types of investments is that they are very high risk and you could lose significant amounts of capital. They have a valuable place in the tax planning world, but should not be used for the sole purpose of avoiding CGT, particularly if you cannot cope with potential losses.

It is very difficult to avoid CGT altogether when you sell a second property, but by following the steps above, you may be able to make substantial savings. Tax advice is recommended.

Please do not hesitate to contact a member of the team if you would like to find out more about tax planning.