Owning a second home, whether a holiday cottage in the country or a buy-to-let portfolio, has long been seen as a valuable asset providing welcomed income. However, a series of tax changes and increased protections for tenants has seen landlords’ profitability erode with many choosing to exit the market.
The additional 5% Stamp Duty Land Tax (SDLT) surcharge on purchases has deterred many would-be buyers, and restrictions on mortgage interest relief and changes to how landlords claim expenses have all had an impact.
At the same time, proposed and implemented reforms to the rental sector, including longer notice periods and the planned abolition of Section 21 notices (the so-called ‘no fault’ evictions), have made renting property less flexible and, for many, less attractive.
As a result, more landlords and second homeowners are choosing to sell up. But what many fail to realise is that selling a second home will trigger an often-sizeable CGT liability that must be reported and paid within 60 days of the sale completion.
What is capital gains tax?
CGT is payable when you sell an asset, such as property that is not your primary home, for more than you paid for it. The gain is the difference between your sale proceeds and the original purchase price, less any allowable costs, such as legal fees, estate agent fees and certain capital improvements.
Every individual has a CGT allowance of £3,000, with higher and additional rate taxpayers paying CGT at 24% on gains over that. Basic rate taxpayers may pay 18% or 24%, depending on the size of the gain and their income.
That reduced CGT allowance means that even modest gains can trigger a CGT liability, particularly for long-held properties that are likely to have risen in value.
A common mistake property sellers make is assuming they can report the sale on their self-assessment tax return at the end of the tax year. If you sell a UK residential property and CGT is due, you must:
- Report the gain to HMRC via the online UK Property Reporting Service, and
- Pay the CGT owed within 60 days of the completion date (not the exchange date).
This rule applies to second homes, buy-to-lets and other properties if they don’t qualify for full main residence relief.
For non-residents, the 60-day filing obligation for UK property applies to both residential and non-residential property, irrespective of whether there is a CGT liability or not.
If the 60-day deadline is missed, you will face a £100 late filing penalty and interest on the unpaid tax. HMRC will also impose late payment penalties if the tax is not paid within 30 days of the due date. Additional penalties will be incurred if the filing or payment of tax is more than 6 or 12 months late.
If you are selling a property that will likely create a CGT liability it is advisable to speak to your accountant.
