Capital gains tax (CGT) is an essential consideration for anyone investing in property, particularly when it comes to second homes or buy-to-let investments. With the 2024/25 tax year upon us, it is crucial to understand how CGT applies, how it can affect your profits, and what steps you can take to optimise your tax position. At Fairman Keable, we believe in breaking down these topics into their simplest form, ensuring our clients are fully informed and confident in their financial decisions.

What is CGT?

Capital gains tax is a tax on the profit made from the sale or disposal of an asset that has increased in value. It is not levied on the total amount of money received, but rather on the gain – the difference between what you paid for the asset and what you sold it for. In the context of property, CGT becomes relevant when you sell a second home, a buy-to-let property or any investment property that is not your main residence.

For the 2024/25 tax year, the CGT rates for residential property are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers (down from 28%). These rates highlight the importance of careful tax planning, especially as property values continue to rise.

When does CGT apply?

CGT applies when you sell or otherwise dispose of a property that is not your primary residence. Disposal can include selling the property, gifting it (unless to a spouse or civil partner), transferring it to someone else or even exchanging it for another asset. It is important to note that your main residence is usually exempt from CGT due to private residence relief (PRR), provided you have lived in it throughout the period of ownership.

Calculating your capital gain

To calculate the capital gain on a property, you begin by determining the property’s acquisition cost, which includes the purchase price plus any associated buying costs, such as legal fees and stamp duty. You then subtract this total from the sale price (minus any selling costs like estate agent fees and legal fees) to determine your gain.

For example, if you purchased a buy-to-let property for £200,000 in 2010, including buying costs, and sold it in 2024 for £300,000, after accounting for selling costs, your gain would be £100,000. This gain is then subject to CGT at the applicable rate.

Allowances and exemptions

Every individual has a CGT allowance, known as the annual exempt amount. For the 2024/25 tax year, this allowance is £3,000. This means that if your total gains in the tax year are below this threshold, you will not owe any CGT. If your gains exceed this amount, you only pay CGT on the excess.

Certain reliefs can also reduce your CGT liability. One of the most significant is private residence relief, which can apply if the property was at some point your main home. Another relief is letting relief, although it is now more restricted and applies only if you share occupancy with a tenant.

Paying CGT for second homes

After calculating your gain and applying any allowances or reliefs, the remaining amount is subject to CGT at the rate corresponding to your income tax band. For basic rate taxpayers, the gain (or a portion of it) will be taxed at 18%, while higher and additional rate taxpayers will pay 24%. The deadline for reporting and paying CGT is within 60 days of the completion of the property sale.

HMRC requires you to report the gain through your self assessment tax return, or if you are not required to file one, via a separate report on the government website. Given the short reporting window, it is important to stay organised and ensure all paperwork is ready to avoid penalties.

Reducing your CGT liability

While CGT is a significant consideration for property investors, there are strategies to reduce your liability. One method is to utilise your annual exempt amount by spreading out the sale of assets over multiple tax years. You could also consider transferring property to your spouse or civil partner, which may allow you to use their CGT allowance and potentially lower their tax rate.

Another approach is to maximise reliefs like private residence relief or letting relief where possible. For those holding property within a limited company, it is worth considering the corporate tax implications, as corporation tax may be more favourable than CGT, depending on your circumstances.

Seeking professional advice is key to ensuring that you optimise your tax position. At Fairman Keable, we work with you to analyse your situation, explore all available options and provide clear, actionable advice that aligns with your financial goals.

The support you need

CGT on second homes and property investments can significantly impact your profits, but with the right planning and understanding, you can manage and even reduce your liability. The 2024/25 tax year brings specific rates and allowances that should be considered in any property investment strategy.

At Fairman Keable, we are here to support you through every step, helping you make informed decisions that protect and enhance your financial wellbeing.

If you would like to discuss how CGT might affect your property investments, contact us to arrange a consultation.