News & Insights
Reducing tax on second homes
People who own second homes have been celebrating the reduction of Capital Gains Tax to 18%, made by Chancellor Alistair Darling in Octobers pre-budget report but a local tax specialist is warning that the benefits may not be as clear-cut as they initially appear.
According to Pauline Noble of Latimer Hinks there are circumstances in which people are better off now, so if they are considering selling their second home they may be well advised to do so before the changes take place on 6 April 2008 especially if they have owned the property for a number of years. Currently, the profits made from the sale of any investment, including a second home, are taxed at either 20% or 40% – depending on whether or not the vendor is a basic or higher rate tax payer.
The amount of profit which is taxed, is reduced when the investment or property has been held for three years or more.. From April next year, however, there will be no such reduction and everyone will pay a flat rate of 18% Capital Gains Tax.
Pauline said: Essentially, higher-rate tax payers who have made a substantial profit on their second property could be better off if they sell on or after 6 April next year. Conversely, people paying the basic rate of tax and who do not stand to make such a large profit may well be advised to sell under the current regime. As the period of ownership may affect the position, both types of vendor stand to make substantial savings if they take professional advice on how to lower their tax liability.
Pauline added: Electing for one of the properties to be the Principal Private Residence within two years of buying or inheriting a second home could make the last three years of ownership free of Capital Gains Tax, meaning people in both tax bands would have to pay considerably less.
