Capital gains tax (“CGT”) is a tax that is charged on the profit that you receive when you sell (dispose) of a qualifying asset. The most common qualifying asset is the sale of a property which is was not used as your main or only residential accommodation (“non-residential accommodation”). Unless a non-residential accommodation is being used for business purposes, there is not much tax relief and it is likely that the seller will have to a significant amount in CGT (unless the property is being gifted to a spouse, occupied by a dependant relative or serves as a second residential home).
With the notion that ‘property is king’, there are many individuals that inherit a second home, have land, have business premises and who purchase buy-to-let properties. Consequently, CGT is something that many individuals will not be aware of until after the property has been sold. However, there is an annual exemption allowance that individuals can use (currently £12,000.00), which allows the first £12,000 of the profit made to be tax free. Additionally, the costs and fees that were incurred in acquiring the property (solicitor’s fees/auction fees and the cost of improving the property, can be deducted from the overall taxable amount. The tax that is to be paid on the property may range from 10 – 28% dependant on various factors. Subsequently, the rate of tax may be dependent on the following:
- Whether the property sold is residential or non-residential.
- Whether the owner(s) are entitled to private residence relief.
- If you had a dependent living in the property.
- Whether the property was bought for the investment purposes (buy-to-let or to sell on quickly).
- Your tax bracket (this will affect the rate that the profit is taxed by HMRC).
In consideration of the above, it is wise to do the following when contemplating selling a second property or properties:
- Seek tax advice from an accountant.
- If you are selling a number of properties for investment purposes, see if creating a company would be more advantageous.
Please feel free to contact Lawdit to speak to the property team with any questions concerning selling a second property or splitting plots of land to sell on to future buyers.