You’re probably aware that Capital Gains Tax (CGT) is a tax on the profit made from selling or disposing of an asset that has increased in value. This includes second homes, which are properties other than your primary residence.
When selling a second home, the gain (difference between the selling price and the purchase price) is subject to CGT at rates depending on your Income Tax liabilities.
- 18 per cent for basic rate taxpayers.
- 24 per cent for higher or additional rate taxpayers.
*These are the rates for residential property; other rates apply to different assets.
Your primary residence is generally exempt from CGT due to Private Residence Relief, so if you are selling the home you live in, you can probably relax!
You’ll notice that the higher/additional rate has been reduced from the previous 28 per cent as of this year.
This means that if you sell a part of your portfolio, you are now set to keep more of the profit you make under the lower tax.
So, is it time to reassess your portfolio?
Recent changes and their impact on your portfolio
The reduction of the higher rate of CGT on residential property gains from 28 per cent to 24 per cent is significant.
This lower rate, effective from 6 April 2024, provides a considerable incentive to reassess your investment portfolio.
Selling a second home or investment property now rather than at the higher rate can result in substantial tax savings, making it an opportune time to consider selling assets that have appreciated in value.
For example, if you have a property that has gained £100,000 in value, the tax saving at the new 24 per cent rate compared to the previous 28 per cent rate would be £4,000.
This reduction in CGT can make a significant difference, especially for higher rate taxpayers who have substantial gains on their properties.
Reassessing your portfolio now could help you take advantage of this favourable tax environment and potentially enhance your overall financial strategy.
An end to furnished holiday lets?
Furnished holiday lets (FHLs) have specific criteria that differentiate them from other second homes. To qualify as an FHL, the property must be:
- Available for letting to the public for at least 210 days a year.
- Actually let for at least 105 days a year.
- Let on a commercial basis with the intention of making a profit.
CGT rules for FHLs can offer certain tax advantages.
For instance, FHLs may qualify for reliefs such as Business Asset Disposal Relief (formerly Entrepreneurs' Relief), which can reduce the CGT rate to only 10 per cent.
However, you may be aware that FHLs are currently under review by the Government and may be subject to changes, restrictions or a throwing out of the scheme all together from as soon as April next year.
If this does come to pass – potentially depending on the outcome of the upcoming General Election – the potential tax savings you’d make by selling your property now would no longer apply.
Again, this should give you pause for thought when it comes to the content of your portfolio, and it might be time for a rethink.
Speaking to your accountant or tax adviser is the easiest way to analyse your finances, so you should make that your first port of call when looking into your potential CGT liabilities.
As you might imagine, effective CGT planning is absolutely vital for current and prospective second homeowners – especially with so much change going on.
There are some reliefs and allowances out there that can help you reduce your liabilities but many of them remain rather complicated.
We suggest you speak to your tax adviser for help navigating the complexities of CGT and to keep you in compliance with all the regulatory requirements.
As tax advisers, we can provide personalised strategies to minimise your tax liabilities and help you take advantage of available reliefs.
