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How to avoid capital gains tax when selling a second home
Are you daydreaming about the gains obtained after selling your second home? But all your yummy delusions seem to be sinking in the turbulent waters of capital gains tax. Don’t sob alone; we’re all in the same boat. However, if you wish to legally and accurately report and pay capital gains tax on UK property, it's crucial to understand the regulations and take the necessary steps to fulfil your obligations as a taxpayer.
Interested in knowing about how to avoid capital gains tax? Let’s dive deeper in this article, where we shed light on expert tricks and tips on how to avoid capital gains tax when selling a second home.
Let’s get to know what capital gains tax is. Capital Gains Tax is implied on the profit you make when you sell any asset, either an investment, stocks, bonds, or, yeah, you guessed it right, a second home.
Whenever you make a profit when selling any asset of yours, the UK government wants their share.
But it is important to note that not all of your earnings will be subject to capital gains tax. In fact, there are strategic manoeuvres to shrink that tax bill down to size. Eagerly want to know them? Don’t switch tabs!
Factors affecting CGT when selling a second home
The amount of CGT implied when selling a second home differs from person to person and depends on several factors:
a) Your annual tax rate (basic or higher)
b) Capital Gain Tax Allowance 2024/25: as of now, in April 2024, it has been reduced to £3,000.
c) Cost of your second home before selling and/or maintenance.
d) The amount of profit you made from selling your second home, i.e., capital gains.
Calculation of your CGT:
For ease and convenience, legal advisors have formulated a handy formula to assist in the calculation of Capital Gain Tax Allowance 2024/25 (CGT). Here’s the scoop:
Capital Gain = Actual Purchase Price minus (Sale Price + Buying & Selling Expenses + Maintenance Expenses)
GCT Payable = (Gains minus GCT Allowance) x GCT Tax Rate
How can we reduce capital gains tax when selling a second home?
We’re surviving in a tax world; the more we owe, the smarter we get at evading! Take notice of the following measures to mitigate capital gains tax when selling a second home:
Utilise your Tax-Free Allowance: Before selling your second home, you and your partner must claim a Tax-Free Allowance available to each of you to maximise the untaxed portion of your total income.
Reduce the gain amount with the maintenance expenses prior to selling.
Keep track of all the associated costs that can later be deducted from the gains, such as listing agent’s costs, legal costs, etc.
How can we avoid capital gains tax when selling a second home?
Just like there are savvy strategies that could reduce your capital gains tax, there are various tactics to reduce or even avoid capital gains tax when selling a second home. So let us dig in:
CGT Exemption
Claim your Annual CGT Exemption
Every UK citizen is entitled to an annual CGT exemption that will allow them to make a certain profit amount on the sale of assets without paying taxes.
Tax Year 2023/24
For this tax year, this CGT for every individual stands at £12,300.
By accurately planning the timing of your property sale and carefully utilising this exemption, you can eventually minimise your CGT liability.
Ownership Transfer
Transfer the ownership of your second home to your civil partner or spouse. In doing so, your CGT liability will be reduced. This is one of the best tax-efficient ways of utilising your CGT exemption.
Distributing the amount of gain between the two partners will help you efficiently utilise annual CGT, effectively doubling the amount of tax-free gains.
Tax-efficient investments
Other efficient ways to reduce CGT liability include investing your gains in an Enterprise Investment Scheme (EIS) qualifying company or fund. This will let the investors defer their CGT as long as they remain associated with EIS.
Profits earned from selling can also be used to be invested in Individual Savings Accounts (ISAs) or pension schemes. ISAs and pensions offer tax-free growth on your investments, allowing you to preserve more of your wealth for the future.
If you have ever rented out your second home during your ownership, then consider yourself eligible for relief.
For individuals and couples, the letting relief amount is £40,000 and £80,000, respectively.
However, this amount is subject to change for landowners who no longer occupy the property as their main residence.
Second Home, Happy Ending
Finally, are you sipping your coffee peacefully or still have questions about how to avoid capital gains tax when selling a second home? Don't let looming tax questions like how to pay capital gains tax steal your peace! Leverage these savvy strategies to minimise or even escape the tax bite and keep more profit in your pocket.
And if you still have questions lingering in your mind, fret not. Remember, selling your second home isn't just about saying goodbye; it's about unlocking exciting opportunities! At RR Accountants, we believe you shouldn't have to choose between selling and keeping your hard-earned money. You deserve both!
Our tax experts will provide assistance with capital gains tax changes, helping you maximise your profits and achieve financial freedom. Take the first step towards a stress-free sale with RR Accountants!
Let's fix your accounting problems with RR Accountants's expert solutions. We're your personal accountants for finance, taxes, company advising, self-assessment and beyond. Use our customised resources to pursue your accounting.
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