What Tax will I pay when I sell a second property and how can I reduce my bill?

Buy to Lets and Short-Term Holiday lets have always been popular investments in the UK. Changes in Letting Laws and Taxation, however, have caused many owners to consider selling their investment properties. Some local authorities are also making it harder to obtain or renew permission for short-term holiday Lets. The Office of National Statistics recently reported that in 2023, East Lothian, a popular holiday destination, saw the biggest fall in the number of short-term holiday lets registered in any part of the UK¹ .

My clients often ask me what tax they might pay on the sale of a second property and whether there is any way to reduce it.  I’ve written this article to help answer that question.

What happens when I sell my property?

When you sell a second property, you usually pay Capital Gains Tax (CGT) on the difference between what you paid for it and what you sell it for. This is known as the gain. If you inherited or were gifted the property, the gain is calculated using the market value of the property on the date of the death or gift. There are reliefs and deductions available that can reduce your potential tax bill. You can deduct the costs of buying and selling the property, along with any improvement works, from the gain. You also wouldn’t pay tax on the gain during any period you lived in the property as your main residence.

The gain can then be reduced further using your annual CGT allowance, this is currently £3,000 in the 2024/25 Tax Year. If the property is jointly owned, the gain would be split between the owners and each owner could use their available allowance. After deductions, reliefs and allowances, the remaining gain is added to your other income for the year. Depending on what you earn, it could be taxed at the Basic Rate of 18% or Higher Rate of 24%.

This might seem complex, so I have included an example below:

• Purchase Price – £100,000
• Sale Price – £400,000
• Deductions – £5,000
• Gain – £400,000 – £100,000 – £5,000 = £295,000.
• Deduct CGT Allowance – £295,000 – £3,000
• Gain = £292,000

In this example, the seller already earns £60,000 p.a. The whole gain would be added to their income and subject to CGT at the Higher Rate of 24%. The resulting tax bill would be a whopping £70,080.

How can I reduce the tax I pay on the sale of my property?

There are several ways you can do this:

Time the sale carefully 

Sell the property at a time when you have little to no income, like the early years of retirement. By doing so, you could benefit from some, or all of the gain falling within your tax-free Personal Allowance or Basic Rate Tax Band. This has the potential to reduce the overall tax you pay.

Similarly, wait to sell in a year where you are likely to make a loss on the sale or disposal of another property or investment. The loss could be used to offset some or all of the gain arising from the sale of your property.

Pay into your Pension 

You can contribute the greater of 100% of your taxable income or £60,000 per year into a pension. If your earnings are higher, and you’ve not used your full allowance in the last 3 Tax Years, you could also Carry Forward unused allowances from those years. The government offers a Top up on money you pay into a pension, known as Tax Relief. Any contributions would immediately benefit from a 20% boost.

If you are a Higher or Additional Rate Taxpayer, you can also claim extra Tax Relief from HMRC. Once claimed, HMRC provide this relief by extending your Basic Rate tax band. This means more of the gain could fall into the Basic Rate Band and be taxable at a lower rate. This could reduce your overall tax bill while setting you up for a more comfortable retirement in the process.

Reinvest some or all of the proceeds 

There are a range of other options available that could help you to reduce your potential tax bill. Your adviser could help you to understand whether these are appropriate for your circumstances.

What are my next steps?

If you’re thinking about selling a second property and are dreading the potential tax bill, don’t worry, you’ve got options. If you’d like to discuss which ones might be right for you, speak to your Financial Adviser. If you don’t have one or would like a second opinion, I’d be glad to help.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Gilson Gray Financial Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website www.sjp.co.uk/products. Gilson Gray Financial Management is a trading name of Gilson Gray Financial Limited.

SJP Approved 25/09/2024

1 – Short-term lets through online collaborative economy platforms, UK – Office for National Statistics (ons.gov.uk) May 2024