Sale of a second home or investment property – Reporting the gain and paying the tax

Unlike a gain on the sale of a main residence, which qualifies for private residence relief (as long as the associated conditions are met), any gain that arises on the sale of a second home or an investment property (such as a buy-to-let property) will be liable to capital gains tax. Since 6 April 2020, different rules apply to residential capital gains as compared to gains on other chargeable assets.

Report the gain

Residential property gains not covered by private residence relief must now be reported to HMRC within 30 days on the date of completion. To do this, it is necessary to set up a Capital Gains Tax on UK property account on the Gov.uk website and use this to report the gain. However, if the gain is reported on a self-assessment return before the end of the 30-day limit, the gain does not also need to be reported via the online service.

A penalty of £100 is charged for a failure to report the gain within 30 days.

Pay the tax

A payment on account of the tax due on the gain must also be made to HMRC within 30 days of the completion date. This is the best estimate of the capital gains that is due at that point in time. To calculate the amount due, the following should be taken into account:

• the annual exempt amount (unless already used on a previous property gain in the same tax year);
• any losses realised prior to completion (unless already utilised on a previous capital gain); and
• the likely rate of tax – this will be 18% if total taxable income and gains for the year are less than the basic rate band and 28% to the extent that they exceed this. The gain is treated as the top slice when working out which tax band it falls into.

Payment can be made online via the taxpayer’s Capital Gains Tax on UK property account. Interest is charged if the tax is not paid within the 30-day window.

The overall capital gains tax position for the tax year will depend on other disposals in the year. If other disposals are made in the year, the position is recalculated after the end of the year on the self-assessment return. Any additional tax falling payable must be paid by the normal capital gains tax due date of 31 January after the end of the tax year. If the eventual liability for the year is less than the amount paid on account in respect of property gains, a repayment of the excess will be made. A repayment may arise if, for example, a loss is made on  shares following the disposal of the property.

Practical tip

When selling a second home or an investment property, remember to work out the capital gain and to report it to HMRC and pay the associated tax within 30 days of the completion date.

Renovating the holiday let during lockdown

The Covid-19 pandemic has hit the hospitality and leisure industry hard. Landlords with furnished holiday lettings have been unable to let their properties for considerable periods of time as a result of national and local lockdowns.

Properties need regular maintenance and refurbishment, and while being in lockdown is not ideal, it does provide a window in which to undertake repairs and generally refresh and improve the property. Where expenses are incurred during a period for which the property is unavailable for letting, are the associated expenses deductible in computing the profits or losses of the furnished holiday business?

General rule

Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.

Impact of property closure

It will generally be the case that repairs and refurbishments are undertaken while the property is not let – no one wants to rent a holiday home to find they are sharing it with builders.

Where the property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers or no business, HMRC allow a deduction for all associated expenses incurred in this period as long as there is no private use. Consequently, where the furnished holiday let is closed during lockdown, a deduction should be forthcoming for expenses incurred in this period.

However, a deduction is not permitted where the property is used privately. Consequently, if the landlord is living in the property during lockdown and undertaking the work at the same time, a deduction will be denied for expenses incurred during the period of private use. The landlord may need to balance the convenience of living in the property while doing the work against the loss of associated deductions for tax purposes.

Repairs v improvement

Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot in computing profits.