Capital gains tax if you own a second home or buy-to-let property

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If you own a second home, you may have to pay capital gains tax on the profits when you come to sell it. However, there are – legitimate – ways that you can reduce your tax bill. What are they?

What is capital gains tax?
You pay capital gains tax on the profit you make when you sell certain things, such as an investment property, shares or other assets. You don’t pay capital gains tax on every penny as you’re given a capital gains tax allowance every year, which is currently (in tax year 2016-17) £11,100. You pay capital gains tax at a rate of 18% if you’re a basic rate taxpayer and 28% if you pay tax at a higher rate.

SAVVY TIP: You pay capital gains tax at different rates if you’re selling shares or other investments. But second properties are taxed at a higher rate.

How to cut capital gains tax
If you own a second property, the first thing you have to do is to tell HM Revenue & Customs which one is your main home. You have two years from buying a property to decide which one you will nominate as your main home. You can’t just make the decision arbitrarily — you have to live in your home for it to qualify as your main or principle residence.

SAVVY TIP: If you have a property that was your main home at any time, the last 18 months of ownership after you move out are free of capital gains tax. This changed from three years in April 2014.

Main home or second home?
You can cut your capital gains tax bill if you split your time between your properties and switch the designation of which one is your main home.

To use an example:

– If you owned two properties for ten years and lived in each of them for five years, when you came to sell one, you’d get 5/10 of the time you owned the property free of capital gains tax.

– Because the next 18 months of ownership are free of capital gains tax after you’ve moved out of a property, you could claim six and a half years free of capital gains tax (the five years you’ve lived in the property plus the 18 months you’re allowed). Now you’ve significantly reduced your potential capital gains tax bill.

Reducing tax on your home
If you own your own home but don’t live in it (perhaps because you have moved into your partner’s property) you could be liable for capital gains tax. The good news is that there are ways of reducing your bill.

– Lettings relief. If you rent out your property, you’re able to claim up to £40,000 lettings relief, while married couples who own a property jointly are allowed to claim £80,000.

– This means that if your house rose in value by £150,000 over a five-year period, if you’d lived in it for a year, you would be able to claim two and a half years’ worth of capital gains tax exemption (the year you lived in it, plus the last 18 months you owned it).

– You would be able to claim up to £40,000 in lettings relief, which would cover the annual gain of £30,000.

– Working elsewhere in the UK. If you move elsewhere in the UK for work, you can do so for up to four years and claim capital gains tax exemption for that period, as long as you live in the property both before and after your period away.

– Working overseas. If you work abroad, you’re treated as though you still live in your UK property for capital gains tax purposes. There is no time limit on how long you can live abroad for, but you have to live in your property both before and after your period away and you cannot nominate another property as your main home.

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