Capital Gains Tax (CGT) is paid to HMRC when an asset is sold for a profit. So, if you’re planning to sell a second house, how can you avoid CGT? In reality, you cannot avoid paying CGT if the property’s value has grown. However, with professional assistance, you may be able to reduce your ultimate CGT charge. So, how much will you have to pay, what deductions are available, and how will it be paid? Continue reading our guide on how to avoid capital gains tax on second homes in the UK.
How to Avoid Capital Gains Tax on Second Homes in the UK?
What is Capital Gains Tax (CGT)?
Capital Gains Tax, or CGT, is a percentage charge paid to the government on gains gained from the sale of real estate, stocks, and other high-value assets. You must pay CGT when you sell any of these assets, assuming they have grown in value. If not, you’d be exempt, and in certain situations, you might use that loss to reduce the amount of tax you’d have to pay elsewhere (more on that later).
However, it does not mean that you will be taxed on ALL of your gains; Capital Gains Tax only applies to a portion of your profits. Every year, everyone (even children) receives what is known as an Annual Exempt Amount. Essentially, a CGT allowance within which any gains are not taxed. It is now £12,300. But wait, there’s more.
The amount of CGT you pay will also be determined when you have owned the asset – for example, your house. The lower the proportion of CGT, the longer you’ve held it. These are the short-term and long-term capital gains taxes—a technicality to be aware of if you consider avoiding CGT.
Fortunately, CGT does not apply to sell a property for most homeowners. You must pay CGT on any property that is not your primary residence – your main house where you have resided for at least two years.
How much is capital gains tax there?
The Capital Gains Tax does not have a fixed cost. The amount you owe will be determined by many criteria related to both your status and the asset.
Here are a few to consider:
- The asset’s fundamental worth – in the instance of real estate, it would be your sale price.
- The asset category – residential property is more vulnerable to CGT than other assets.
- How long have you held the asset – Assets that have been held for a longer length of time are normally taxed at a lower proportion.
- Your tax status: The amount of Capital Gains Tax due by higher-rate taxpayers is generally greater.
How do I calculate capital gains tax?
When calculating your capital gains tax, the first thing you should do is assess what sort of taxpayer you are. Apart from the asset’s worth, it is probably the most important factor to consider of all the items to look for.
To do so, you must first calculate your taxable profits. After subtracting any permissible losses, it is the amount of money you earned from the asset (more on these later). So, for example, if our taxable gain is £15k and we have £2k in allowed losses, our total taxable gain would be £13k. Next, when writing the article, we take our £13,000 and subtract the CGT tax-free allowance, now £12,300. It leaves us with £700, which is susceptible to CGT.
So, now that we’ve determined our taxable amount (£700), we must calculate the proportion of Capital Gains Tax we must pay. Everything is determined by whether you are a basic or higher/additional rate taxpayer. At the time of writing, basic rate taxpayers are individuals who earn less than £37,700 per year.
Multiply your £700 value by your yearly income to determine which one you are. In This situation, our yearly income is £35k, leaving us with £35.7k. As a result, we would be classified as basic rate taxpayers, and our £700 would be liable to 18% tax (£126). The reason for It is because we just sold a property. See the Capital Gains Tax categories below to see why we were taxed 18% in This case.
Taxpayers on the basic rate: If you fall into the category, you will pay 10% on any profits, or 18% if the gain comes from residential property.
Higher/additional rate taxpayers: If you fall into the category, you’ll pay 20% on capital gains or 28% if the profits are on residential property.
Allowance for Capital Gains Tax
You do, however, have an annual capital gains tax allowance. The allowance for the 2020-2021 tax year is £12,300. Couples who hold assets together may pool It exemption, possibly enabling a gain of £24,600. It cannot continue. To put it another way, if you don’t utilize it, you’ll lose it.
What may additional taxes levy on UK property?
- CGT is one of the taxes payable on properties in the UK when they are sold.
- When you acquire a property, you will almost certainly be required to pay stamp duty on the purchase price. The amount varies depending on whether the property is your primary residence, a secondary residence, or a buy-to-let investment.
- Residents must also pay council tax, which is determined by the size of the property, its location, and a few other considerations.
- If you rent out a home, you will almost certainly have to pay income tax on your rent.
- In addition, if you leave property to someone after your death, inheritance tax may be levied on a portion of its value.
Capital gains tax on any profit (gain) you earn when you sell a property, not your primary residence. The difference between what you purchased for the property and what you eventually sell it for is your profit. You must also pay capital gains tax if you dispose of a property in another manner, such as by giving or transferring it to another person or exchanging it for another asset. In This case, the property’s market value will be used instead of the selling price.