Property income is a common source of earnings for many UK taxpayers. People often rent out their main home or purchase a second property specifically to rent out and generate passive income. While owning a second home can be exciting, potential owners should be mindful of the tax implications, such as the higher rates of Stamp Duty Land Tax (SDLT) on the new property and Capital Gains Tax (CGT) upon selling the property.
This article explores the nuances of owning a second home that potential landlords must be aware of before proceeding with their plans of becoming a second homeowner.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is charged on the disposal of any asset that has increased in value since its purchase. If someone is planning to purchase a second home by disposing of their current home, CGT often comes into play. As the name suggests, CGT is charged on the gain that has arisen over the years. Taxpayers can deduct the initial purchase cost and any capital improvements made over the years to arrive at the capital gains on the property.
Once calculated, taxpayers can deduct capital losses in the earlier years or the unused annual exempt amount of the current year, set at £3,000 for the year 2024/25. The resulting figure called the taxable gain, is multiplied by the relevant rate for the computation of capital gains tax liability.
For the tax year 2024/25, the capital gains tax rate is as follows:
Income Threshold | Residential Property | Others |
|---|---|---|
Basic rate (below £50,271) | 18% | 18% |
Higher Rate (Above £50,270) | 24% | 24% |
To reduce the participation of investors in the UK residential property market, the UK government has increased the capital gains tax rate on the disposals of residential property. As per HMRC, UK residential property includes the following:
- Interest in UK residential property
- Properties in the process of being constructed or adapted for use as a dwelling
- The right to acquire a UK residential property ‘off plan’
- A UK residential property that isn’t your main home
- Your main home if it’s very large or you have let it out, used for business or has a long period of absence
The disposal of a UK residential property must be reported within 60 days from the completion date of the transfer. The deadline for making CGT payments is the same as the deadline for reporting.
Illustration:
Mr. Mehta recently purchased a new residential property. He has decided to sell his previous home and has found a potential buyer. They have agreed on the selling price of £500,000. Mr Mehta initially purchased the property 15 years ago for £300,000. The property has not incurred any capital expenditure, except the legal costs on purchase of £3,500.
Mr Mehta makes £45,000 from his employment. His capital gains tax is calculated as follows:
Sales Proceeds | 500,000 |
Less: Purchase cost | (300,000) |
Less: Legal fees on acquisition | (3,500) |
Capital gains | 196,500 |
Less: Annual Exempt Amount | (3,000) |
Taxable gains | 193,500 |
Capital gains tax liability:
(50,270 – 45,000) @ 18% plus (193,500 – 50,270) @ 24% | £35,323.80 |
This calculation assumes that Private Residence Relief (PRR) does not apply. If the property had been Mr Mehta’s main residence throughout his ownership, PRR would cover the entire gain, and no CGT would be due.
PRR is a huge tax reliever for taxpayers selling a property which has been their main residence for a certain period of ownership. You can learn more about how much of the relief you can claim with our complete guide to Private Residence Relief (PRR).
Similarly, individuals who have let out a part of their main residence during the ownership are able to claim the letting relief.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is a tax charged on the purchase of land and buildings in the UK. SDLT is calculated on the value of the property and the applicable rates for the transaction. The SDLT rates depend on several factors, such as the residency of an individual, whether the purchaser already owns another property, etc. First-time buyers can claim the first-time buyers’ relief if the value of the purchase is below £625,000.
In contrast, if an individual who already owns a home makes another purchase, they will be subject to SDLT at higher rates, a 5% increase from the basic SDLT rates.
Property Value | UK Resident Rates | Non-UK Resident Rates |
|---|---|---|
Up to £250,000 | 5% | 7% |
£250,001 - £925,000 | 10% | 12% |
£925,001 - £1.5 million | 15% | 17% |
Above £1.5 million | 17% | 19% |
If the new property is purchased for the purpose of replacing the main residence, the 5% SDLT surcharge will not apply. On the date the property is purchased, if the individual has not sold his main residence, the higher rates will apply. However, if the previous main residence is sold within 36 months, individuals can apply for a refund of the surcharge paid.
There are certain conditions that must be met for the SDLT refund to be successful. Discover the criteria and your eligibility with our article, SDLT Surcharge Refund Claim.
Council Tax
Council tax is another charge that property owners in the UK must pay. Unlike most taxes, the council tax is collected by the local councils and used to fund local services. Council tax is payable even on empty properties. If an individual owns a property and subsequently buys a new one, they will be charged council tax on the second property as well. Starting from 1 April 2025, the Council Tax on a second property can be as much as twice the standard rate.
Conclusion
Owning a second home can be a rewarding investment, offering potential rental income and long-term financial gains. However, it also comes with significant tax implications that potential homeowners must consider. Understanding the impact of Capital Gains Tax, Stamp Duty Land Tax, and Council Tax is essential for making informed decisions and avoiding unexpected costs.
By being aware of these taxes and planning accordingly, prospective second homeowners can better navigate the financial landscape and optimize their property investment.
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