Selling a second property that is not your main residence, may result in capital gains tax. How much you pay depends on whether there is a ‘gain’ after certain deductions are taken into account, your allowances and whether you are a basic or higher rate tax payer.
Calculating the taxable gain
As a guide, the ‘gain’ is calculated by taking the purchase price from the selling price. You can then deduct stamp duty payments, legal fees and estate agents costs on both the original purchase and sale, plus the cost of major capital improvements, such as, extensions or fitting new kitchens and boilers, e.t.c. to give the ‘gross gain’.
There are various allowances available against this gain:
- Principle Private Residence Relief (if you lived in the property at any point);
- Letting Relief (if you rented the property after having lived in the property at any point);
After these are deducted you have a net gain.
Each person has an annual exemption every year (currently £11,100) which can be offset against the gain. The exemption only comes into effect in the year you make the net gain. In addition if the second property was in joint names, you can divide the net gain between the two parties.
Basic or higher rate tax
If you pay tax at the basic rate, the capital gains tax would be payable at a rate of 18% and if you pay tax at the higher rate, it would be 28%. Currently the higher rate tax is payable if your earnings are £42,385 (or £43,000 from April 2016).
If your net gain is £60,000 and the property was in joint names, this means you would have to pay tax on £30,000 minus your exemption of £11,100. If you are a higher rate tax payer, then you would pay 28% tax on £18,900 amounting to £5,292 in capital gains tax.
However if a person’s income splits across the tax bands – then it is a mixture of both rates.
Fill in your tax return
Don’t forget that if you have made a capital gain in the year, you will need to register with HMRC to complete a tax return.
As you can see it really is worth getting some advice to make sure you pay the correct amount of capital gains tax so contact us at IN Accountancy for help with this matter.