The worst boroughs in London to sell a second home because investors must pay a capital gains tax bill of £16,000

Ten years of rising home prices are helping London real estate investors who are selling up, but many are paying more in capital gains taxes as a result

According to recent analysis, the average capital gains tax paid by second home owners in the capital when they sell is over sixteen thousand dollars. However, some sellers are exempt from this tax due to a decline in the value of prime London real estate.

Considering how bad the London real estate market is right now, it might be a good time to purchase a home there. According to data from estate agency Jefferies London, second home purchases fell 42% in the 12 months ending in June for second homes in the capital, while the decline was more pronounced in the prime market, falling 51.4 percent. In London, the total number of transactions decreased by 20.5% from the previous year.

However, capital gains tax is due for those who do manage to sell a second property and make a profit. Compared to other asset classes, capital gains tax rates are higher for real estate. The current tax rate for basic rate taxpayers is 18 percent on any gains from the sale of a second property. Currently, 24 percent is paid by taxpayers with higher and additional rates.

The average London property's gains over the past ten years were examined by mortgage broker Enness Global. It was discovered that the average seller will have to pay a double-digit CGT bill due to increases in property prices over the past ten years, as well as decreases in capital gains tax allowances and rate increases.

According to Islay Robinson, CEO of Enness Global, "With recent rate hikes and the reduction of the annual exemption, capital gains tax has become a more important factor for real estate investors. Although the London market continues to yield strong long-term returns in many regions, those gains now come with a higher tax burden for second home owners."

In a different piece, we examine strategies for reducing your capital gains tax liability.

How much capital gains tax is typically owed on second homes in London?

Enness examined the change in property value since 2015, deducting the capital gains tax allowance of £3,000 and other allowable expenses like stamp duty, legal fees, and estate agent fees.

In order to account for the current rates applied to basic and higher rate taxpayers, it then computed the total amount of capital gains tax due at both 18 and 24 percent.

According to the research, a lower-rate taxpayer in London would typically owe 12,334 in capital gains tax on a second home, whereas a higher-rate taxpayer selling a second home today would be charged 16,446.

This is predicated on the average property investment costing 462,097 ten years ago, which included 2,399 in legal fees and 13,105 in stamp duty. The same property has gained 99,490 in value, reaching 561,587 ten years later.

This results in a total of 27,966 eligible deductions for the purposes of the capital gains tax calculation, with an average estate agent fee of 9,547 and legal fees at the point of sale of 2,915. The total capital gains subject to tax, including the additional 3,000 CGT allowance, would be 68,524, with capital gains tax payable at either 18 percent for basic rate payers or 24 percent for higher rate taxpayers.

The worst boroughs in London to own a second home in.

With a capital gains tax liability of 24% higher than the average, Redbridge is the worst borough to own a second home over the past ten years, with a 31,381 capital gains tax bill due.

Havering (a CGT bill of 30,153), Bromley (29,140), Bexley (29,052), and Waltham Forest (29,006) are the next worst places for second home owners to sell up.

Since 2015, the price of homes has increased significantly in each of these areas, which has resulted in large capital gains tax bills for those who are leaving the market.

Second home owners in prime London are evading CGT.

However, due to ten years of market stagnation and, in some cases, decline, second home owners in prime central London have mostly avoided capital gains tax (CGT), while those in outer London have experienced sharp increases in property values and consequently capital gains tax bills.

According to an Enness analysis, the average home in Kensington and Chelsea is now worth 75,546 less than it was ten years ago, with no capital gains tax due when selling a second residence. The City of London, Westminster, and Hammersmith and Fulham have all seen price reductions since 2015.

Due to poorer market performance, second home owners are not subject to CGT when they sell, even in boroughs where values have increased somewhat. After the CGT allowance and deductible expenses are taken into consideration, long-term investors in areas like Tower Hamlets, Islington, Wandsworth, and Southwark are essentially exempt from capital gains taxation because these areas have seen very little appreciation over the past ten years.

Many high-end second home owners have been protected from capital gains liabilities by the decline in values in many prime postcodes over the past ten years, according to Robinson. The bright side is that they won't face penalties for attempting to sell off underperforming real estate assets in the current market environment, even though they might lose money on the equity that was built off their investment.

It serves as a reminder that returns on real estate investments are very localized and that when managing or selling a high-value asset, careful planning, timing, and structuring are essential.