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Selling, transferring properties and Tax Planning – Part 1 of 5

August 23, 2013

Posted by Simon Misiewicz on 19th August 2013

Are you looking to sell any of your rental properties in the future?

Are you thinking about passing your property onto a loved one?

Here are the 5 keys to tax planning when selling a property:

  1. Selling Properties As A One Off & Capital Gains Tax (CGT)
  2. Selling properties as a trade (Income tax V Corporation tax)
  3. Using trusts and inheritance tax planning
  4. Transferring assets between spouses
  5. Residency / Domicile – UK & International tax

So without delay let us get into Part 1: Selling properties as a one off & Capital Gains Tax

If you are looking to sell a property you will have to pay CGT. The amount of CGT will be determined upon many different things (3):

  • The amount of money you earn in employment
  • The amount of money you earn as a business
  • The amount of time that you held the asset as a home V investment
  • The profit made on the property (sales proceeds less purchase price, less purchase and sales transactions costs.

Example:

Sarah buys a property for £100,000 and incurs £500 legal fees and other associated finance arrangement fees of £2,500. She then spends £5,000 on improvement costs (10). If she worked with me I would have reduced her income tax through capital allowances but never mind!!

Later in the same year she then sells the property for £120,000 and pays the estate agent £1,500, solicitors £500. The profit is shown below:

£120,000 sales proceeds
£100,000 less purchase price of the property
£5,000 Less Property improvement costs
£1,000 Less legal / solicitors fees £500 X 2
£1,500 Less estate agent fees
£2,500 Less arrangement fees
£10,000 taxable profit

Please note the acquisition costs and sales costs are not revenue items. I have seen many accountants and clients, before they worked with us, treat these incorrectly and HMRC prey on people that are not aware of the rules (1) (4).

Luckily for Sarah in this example that the profit of £10,000 is less than the CGT tax free allowance (2015-16) of £11,100. She therefore does not need to pay any tax on this profit (2).

Quick tip:

If you are looking to sell many properties it may be useful to stagger the sales through the fiscal years to make use of your allowances each year. However, a transfer between partners is treated at market value. If the value is deemed to be less than market value then a gift has been made to the other spouse (7).

You will note that HMRC defines partners in life as individuals when it comes to profit ownership. As such if a property owned in the wife’s name can only use her CGT allowance and not the husband’s (5) (6).

Quick tip:

Another way to reduce your tax liability is to use the CGT tax free allowance of your spouse by changing the legal documentation on ownership to split the asset between spouses. You will need to ensure that the ownership and allocation of financial benefit Is the same (7).

CGT reduction – Private Residence Relief

When you sell or dispose of your own home you won’t have to pay any Capital Gains Tax if you satisfy two conditions. For the whole time you’ve owned it both the following must apply:

  • it’s been your only home or main residence
  • you have used it as your home and nothing else

To work out the relief, you need to work out the period that you’ve owned your home for. This starts on the later of:

  • the date you bought or acquired it
  • 31 March 1982

It ends on the date that you sell or dispose of it.

The final 18 months always qualify for relief. This applies even if you weren’t living there during the final three years. It must have been your only or main home at some point during the time that you’ve owned it (8)

Example:

You bought your house in January 2001 and sold it in December 2012. You lived in the property as your only or main residence apart from 18 months in 2003 and 2004, when you lived in a different house. So the house qualifies for relief for 126 out of the 144 months you owned it. A proportion of any gain you make from the disposal amounting to 126/144 will qualify for relief.

If you had moved out of the house at some time after December 2009 instead of in 2003 and 2004, your relief would not be restricted (9)

Example

You bought your house in December 2002 and sold it in December 2015, owning it for 13 years. You lived in the property as your only or main residence from December 2002 to December 2008 (six years).

It was then let as residential accommodation from January 2009 to December 2011 (three years) and then empty until sold at a gain of £150,000. You are entitled to PRR for seven-and-a-half years (six years of residence plus the final 18 months) out of 13 years. This part of the gain is £86,538 (7.5/13 x £150,000). Your remaining gain is £63,462. The lowest of the three limits set out above is the gain by reason of the letting £34,615 (3/13 x £150,000) so you are entitled to further letting relief of £34,615. Your chargeable gain will be £28,847.

Simple eh?

 

References:

(1)CG10241 – Capital Gains Tax: Computation

(2)Capital Gains Tax Rates and Annual Tax Free Allowances

(3)CG10260 – Interaction with Income Tax

(4)CG10397 – Self-Assessments: Power to Call for Documents etc

(5)CG10790 – Persons chargeable: husband and wife or civil partners: dealt with separately

(6)CG22000 – Transfer of assets between husband and wife or between civil partners: separate persons

(7)CG22002 – Transfer of assets between husband and wife or between civil partners: connected persons

(8)Capital Gains Tax relief on your own home

(9)Private Residence Relief

(10)CG15180 – Expenditure: enhancement expenditure

Next steps

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk