Congratulations! You’ve just sold, or are about to sell, a second home at a tidy profit. Now, all you need to do is pay the capital gains tax (CGT) on it, which, if you are a higher-rate taxpayer, stands at a hefty 24%. For context, a house sold at a £50,000 profit could see a capital gains tax bill of £12,000, which would need to be paid within 60 days of the sale’s completion. It all seems straightforward, but as anyone who’s been following the political news recently will know, even senior politicians get themselves into trouble over the tax. Step forward, Angela Rayner! In her Newsnight interview, she said, fairly enthusiastically, that she did not know the married couple rules around CGT when she sold her property

Ms Rayner says, “As with the majority of ordinary people who sell their own homes, I was not liable for capital gains tax because it was my home and the only one I owned.”

Let’s clear up a common misconception. For capital gains tax purposes, married couples can only have one principal residence. If you and your spouse own more than one home, you can choose which one is your “principal residence” for CGT purposes. Just remember to send it within two years of the situation arising.

NMTBP suspects many people would find every part of this surprising. Most taxation works by reference to individuals, so it’s odd this rule allows only one principal residence per married couple. Odder still that marriage potentially creates a big tax disadvantage. And even more curious, you are free to choose which property is your “principal residence” without reference to whether it really is. It’s, therefore, hard to blame Ms Rayner for misunderstanding the rules

But it’s important to remember two things:

First, the tax system is complicated, and many people accidentally pay the wrong amount of tax. That’s not a crime, even if you’re careless or negligent. Ignorance is (in effect) a defence to the crime of tax evasion because ‘tax evasion’ means intentionally and dishonestly failing to pay tax. Second, everyone still has a duty to pay the correct amount of tax, and ignorance is no defence to having to pay it. Pay the wrong amount of tax (for any reason), and you’ll have to make up the difference, plus interest. And if you were careless or failed to fess up to HMRC, then you’ll pay penalties, too

What is capital gains tax?

For those who are unfamiliar, capital gains tax (CGT) is the tax payable whenever the sale of an asset generates a profit. An asset can be anything from stocks and bonds to classic cars, art, and, you guessed it, a second home. If you make a profit, the government want their share

Capital gains tax on homes

The fundamental rule is that the gain on your main home, known as your principal private residence (PPR), is tax-free if it has been your PPR throughout your ownership period.

Some people have two or more homes. Most commonly, this is a holiday home or where a family wants a place in the country but keeps a second property elsewhere for work purposes. In these circumstances, the owners can make an election (or separate elections with joint ownership) in writing to HMRC nominating which property is to be treated as their PPR for tax purposes—regardless of which is used most in practice. This nomination has to be submitted to HMRC within two years of the second purchase but having done so the nomination can subsequently be changed as you like.

Where a home is jointly owned by a couple who aren’t married, they can make separate nominations in respect of second homes independently. However, once married they are only able to have one PPR. This is often regarded as a disincentive to marriage but rules are rules

How much is capital gains tax on a second home?

The amount of CGT you will pay on a second home will depend on a few factors, namely:

• How much profit you made on the home sale, i.e. your gains
• If you pay a higher or basic tax rate
• The cost of selling and or improving the house prior to sale
• Your capital gains tax allowance which is £3,000 annually

To find out how much you’ll pay you first calculate your gain, subtract your capital gains tax allowance (if the asset was owned by you and your partner you can both apply your allowance to this), then multiply by your capital gains tax rate, as follows:

Gain = Purchase Price – (Sale Price + Buying & Selling Costs + Improvement Costs)

GCT Payable = (Gains – GCT Allowance) x GCT Tax Rate

How to reduce capital gains tax on a second home

1. Make sure to use the tax free allowance for both you and your spouse or civil partner
2. Record all costs associated with the sale as they can be deducted (think selling agent, and legal costs)
3. Reduce the gain by any renovation works recently completed that were required to sell the property

Common questions on capital gains and investment properties

Do I pay capital gains tax in the UK on a property I’ve sold abroad?  Yes and you may also have to pay capital gains tax in the country where you sold the property so it may be worth engaging a solicitor and/or financial advisor to assist you with this

When do I pay the capital gains tax due on the sale of a second property?  Unlike capital gains achieved from other assets where you pay your capital gains tax as part of your tax filing for the tax year you sold the asset in, you only have only 60 days from the sale of the property to report and pay the capital gains tax

How do I pay CGT due on the sale of a second property? Fortunately this can be done online by visiting Gov.uk

NMTBP posts should not be taken as financial advice but as a starting point for readers to undertake their own further research