This week, the hundreds of thousands of people who own second homes in the UK face council tax bills that will have nearly doubled, says David Budworth in The Sunday Times. The Government has given local authorities the green light to slash the discount on second homes from 50% to just 10%. So which tax rules exist to help you offset this rise?
One way to reduce the capital gains tax (CGT) bill on your second home, should you come to sell it, is to elect it as your main residence, as this will remove three years of your ownership from the CGT calculations. When you buy a second home, you have two years to elect one of your properties as your principal residence, after which time you lose the right to make a nomination. Once you have made the election, you can pick either home and alter your choice as and when you wish. However, bear in mind that you need to have lived in your second property for a short amount of time in order for it to be eligible.
Business taper relief will also reduce your CGT bill. If you have owned the property for ten years, you will have to pay 24% on any gains, rather than the usual CGT rate of 40%.
It is also a good idea for lower-earning spouses (ie, basic-rate taxpayers) to own a larger proportion of the property. If they own three-quarters of a second home that has gained £50,000 in value after ten years, and you own the remaining quarter, you will pay £7,140 in tax on the sale. If you had owned equal shares, the tax bill would have been £9,300.
If by any chance you bought your second home before 5 April 1988, you can also get CGT exemption if it is lived in by a dependent relative, who can be unemployed, a widow, or infirm (in practice, anyone over the age of 65).
There is another, better way of reducing your tax bill. As long as Gordon Brown does not change his mind, from 2006 you should be able to avoid tax on income and gains from a second home by putting it in your personal pension.