How can capital gains tax be avoided on the second home?

Having multiple properties makes one think about planning the capital gains tax. You may want to sell your second home to buy a new property or fund your retirement. Whatever the goal, paying the capital gains tax is challenging. It is a huge amount to settle before selling the second home.  

However, most experts argue you don’t need to pay capital gains tax for second homes. One must meet a few conditions to qualify for that. The blog lists the best ways to avoid the capital gains tax on second homes.

How does capital gains tax work on the second property?

Capital gains tax is the tax one pays on a property if it increases in value from the date one purchased it. Precisely, you owe tax on the profit you make on the investment. Understand the profit you made by calculating.  For example, you bought your second home for £200,000. It is now worth £350,000.

Here, you made a profit of £150,000. No, you don’t pay this complete amount as tax as capital gains. Instead, you pay only a percentage of the profit amount. If you are a basic taxpayer, you must pay 18% of the profit. This means that you pay £27000 in capital gains tax.  Alternatively, as a high taxpayer, you pay 20% as tax. It means you pay £30000 as capital gains tax.

The authority provides a timeline for when you must pay the tax. If you are about to approach it but can’t budget enough, check other ways. You can finance the needs using external finance options for fair and poor credit history.

If seeking the latter, get loans for bad credit from a direct lender now. It may help you settle the tax payments without attracting penalties. You may get it with authentic affordability proof and stable finances. In this way, you can avoid panic and do what is needed in a timely manner.

6 Strategies to Avoid Capital Gains Tax on Second Residential Property

Paying the capital gains tax on the profits is important. Plan your expenses and budget accordingly. You must pay the dues within a scheduled timeline. However, you can skip the tax under a few conditions. It may seem a big relief on your net worth. Let’s quickly check how to avoid capital gains tax on a second property:

1) Understand the 36-month rule

The 36-month rule for the capital gains tax on UK premises is helpful. It is an exemption period before the property sale. You must pay the tax on the chargeable gain you made on the property. Don’t worry, as you may be entitled to private residential relief. This means that you can avoid the payments for the last 9 months you owe the property. However, if you own just a home, you may qualify for the full relief. It means you don’t need to pay for 36 months.

2) Pay nothing if values remain the same

The government charge the capital gain tax only if the property price increases. You pay nothing if your property‘s value remains static throughout the year. However, if selling a buy-to-let, you may face some tax implications.  Here are other situations where you must pay the capital gains tax:

• The home includes a lot of land/ buildings
• You have sub-let a part of the home for commercial use
• You use a part of your home for business only
• You are a property developer and bought one to benefit from profits
• You hold another residential property as your main residence.

3) Skip CGT on the inherited property

You don’t need to pay capital gains tax on an inherited property. If you have settled the inheritance tax dues, you are not liable for capital gains tax. However, you must pay one if you intend to sell the inherited property.

The authority calculates the amount you owe from the date of the property ownership after inheritance. Alternatively, selling your property occupied by a dependent relative is not liable for Capital gains tax.

4) Leverage Capital gains tax allowance

It is one of the best ways to skip paying the Capital Gains Tax. All the citizens of the country get an annual allowance of £12,300. If the home value has not grown much, you can skip it. However, the profit you earn must be less than the allowance amount.

Couples may benefit from this strategy. You can combine your allowances. It increases the total costs of the annual allowance to £24,600. For example, you earn a profit of £15000 on the second home. You don’t need to pay tax as a couple. It is because the profit earned is less than the allowance.

5) Transfer the property to a spouse or civil partner

Transfers between the spouses are currently exempt from CGT rules. You can avoid the tax if:

• You got separated and don’t live together within that tax year
• You gave them the goods for the business to sell

In this, you transfer the assets to a spouse or civil partner.  These assets act as a part of disposal. It effectively doubles up the CGT allowance for married couples and civil partners. However, one must transfer the assets genuinely. You can consider a solicitor or experts to work on your part. However, it entails a fee. Arranging for one may be tough amid the legal proceedings. Don’t worry; you can get instant cash loans to bridge the fee. It prevents you from losing the best solicitor on the board. It is the best way to get away with minor cash shortfalls.

6) Declare your second home as a primary residence

The government grants citizens the flexibility to switch their primary residence on paper. Thus, you can decide carefully and make your second one your primary property. You can usually do that within 2 years of owning the second property.

For example, you own a cottage as your primary residence. You buy a new flat in the city. Thus, you have 2 years to decide the change from the day you buy the property. If you sell the cottage, it is no longer your primary residence.

The tag automatically shifts to the new flat. Thus, you don’t have to pay the capital gains tax on the cottage. Similarly, you don’t pay tax on the previously owned primary properties. Moreover, you don’t pay for one when you don’t live there full-time.

Bottom line

These are some ways to avoid capital gains tax on your second home. However, analyse the regulations before tapping any. Unawareness or innocence about facts might lead you to trouble. Identify the best time to change your second home status.  It may help prevent you from being charged capital gains tax. Additionally, leverage the capital tax gains allowance to your benefit.