How to avoid capital gains tax on a second home.

Congratulations! You’ve just sold, or are about to sell, a second home at a tidy profit. Now all you need to do is pay the capital gains tax (CGT) on it which, if you are a higher rate tax payer, stands at a hefty 28%. For context, a house sold at a £50,000 profit would see a capital gains tax bill of £14,000 which would need to be paid within 60 days of the sale completion.

Surely there’s got to be a way you can reduce some, or all of that bill?

Well, investing in EIS offers a number of options around capital gains tax that can be of use in this situation, the main one being the option to defer a gain for as long as you hold EIS shares (this can be indefinitely, if you don't dispose of them). What's more, you can defer gains of any size, made up to three years before and one year after the EIS investment.

To find out more about how the Access EIS Fund can work for you or your clients. Use the link below to schedule a call with our expert, Ben Charrington.

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What is capital gains tax?

For those who are unfamiliar, capital gains tax (CGT) is the tax payable whenever the sale of an asset generates a profit. An asset can be anything from stocks and bonds to classic cars, art and, you guessed it, a second home. If you make a profit, the government want their share.

How much is capital gains tax on a second home?

The amount of CGT you will pay on a second home will depend on a few factors, namely:

How much profit you made on the sale of the home i.e. your gains.
If you pay higher or basic tax rate.
The cost of selling and or improving the house prior to sale.
Your capital gains tax allowance (£6,000 at time of writing this, going down to £3,000 in April 2024).

To find out how much you’ll pay you first calculate your gain, subtract your capital gains tax allowance (if the asset was owned by you and your partner you can both apply your allowance to this), then multiply by your capital gains tax rate.

The two key steps are outlined below.

Gain = Purchase Price – (Sale Price + Buying & Selling Costs + Improvement Costs)

GCT Payable = (Gains – GCT Allowance) x GCT Tax Rate

How to reduce capital gains tax on a second home

Make sure to use the tax free allowance for both you and your spouse or civil partner.
Record all costs associated with the sale as they can be deducted (think selling agent, and legal costs).
Reduce the gain by any renovation works recently completed that were required to sell the property.

How to avoid capital gains tax on second homes in the UK

While you may ultimately end up paying some of the capital gains tax due, Investors can defer paying capital gains tax owed on the sale of a second home by investing the gain into an Enterprise Investment Scheme (EIS) qualifying company or fund. The capital gains tax is deferred as long as the gain remains in EIS investments.

Should the EIS investment turn a profit the investor can continue to defer their original capital gains tax bill by re-investing an amount equivalent to the initial gain (less any capital gains personal allowances they can apply to it) back into EIS.

In addition to capital gains tax deferral, the Enterprise Investment Scheme offers investors many other tax reliefs. Read on for more about the Enterprise Investment Scheme tax reliefs.

Common questions on capital gains and investment properties

1. Do I pay capital gains tax in the UK on a property I’ve sold abroad?

Yes and you may also have to pay capital gains tax in the country where you sold the property so it may be worth engaging a solicitor and/or financial advisor to assist you with this.

2. When do I pay the capital gains tax due on the sale of a second property?

Unlike capital gains achieved from other assets where you pay your capital gains tax as part of your tax filing for the tax year you sold the asset in, you only have only 60 days from the sale of the property to report and pay the capital gains tax.

3. How do I pay CGT due on the sale of a second property?

Fortunately this can be done online by visiting Gov.uk.

To submit and pay you will need to:

Create a 'Capital Gains Tax on UK property' account here. Without one you'll be unable to declare or pay any form of CGT.
Submit a CGT calculation of what you think you owe in Capital Gains Tax (HMRC may make amends).
If HMRC does make amends to your calculation, check why they've been made and if there's any that you don't understand, reach out to them directly.
Pay your capital gains tax bill.

See our guide to EIS and capital gains tax

For full information on the options EIS investing can offer around capital gains tax, see our guide to EIS and capital gains tax.

Further EIS tax reliefs

In addition to capital gains tax deferral, EIS offers the following tax reliefs to investors:

30% income tax relief on a maximum of £1m invested in EIS. This rises to £2m if at least £1m is invested in knowledge-intensive companies (KICs). Tax relief can be applied to the year shares are issued, or carried back and applied to the previous year.
Capital gains tax disposal relief. Provided shares are held for three years, any gains they realise are not subject to capital gains tax. Note, in order to claim capital gains disposal relief, you must have made a claim for income tax relief.
Inheritance tax exemption. EIS shares qualify for Business Property Relief, and provided they are held for two years, they are exempt from inheritance tax (IHT). This makes investing in EIS a method for rapidly making a portion of one's estate IHT exempt.
Loss relief. If EIS shares are sold at a loss, the loss amount can be set against your income tax or capital gains tax bill.

The Access EIS Fund

Our fund co-invests with proven angel investors to build large portfolios of hand-picked companies for our investors. All EIS investing is high risk, and we can’t guarantee that every startup we back will be a unicorn, but we’re confident that our approach is the smartest on the market. Even better, we can show you the data to prove it.

If you would like to find out more about avoiding capital gains tax when selling a second home and the tax benefits of investing with the Access EIS Fund, call us on 01223 478 558 and we'll be happy to answer any questions you might have.

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