By Louise Misiewicz Article relevant to the tax year 2017/18
Are you looking to dispose of an investment property?
Are you looking at ways of avoiding Capital Gains Tax (CGT)?
Before we go into the details, we at Optimise, still believe that properties still have a place for everyone. There are many property investments out there that will deliver a much better return than any other investments.
What we are saying to clients is that Section 24 should not be taken lightly and selling some properties and use the money to pay off mortgages (mitigating the impact of Section 24) or to reinvest into better performing property investments. For some this could mean either a) selling single lets and buying HMOs or holiday lets (the latter not affected by Section 24) or b) keeping single lets but paying off the mortgages, which means the tax will never go beyond 40% for high rate tax payers and 45% for additional rate tax payers.
We have seen high rate tax payers with a current liability of 40% increasing to 135% (the worst case we have seen) tax on their property portfolio because they are highly geared.
I have written many articles about Capital Gains Tax (CGT) and the ways that CGT may be avoided or mitigated altogether. Before I go into the details, let’s remember that CGT is based on the sales process less the purchase price less the capitalised refurbishment costs less the allowances that may be used. Please also do not forget that everyone has a CGT annual allowances and at the time of writing was £11,300. If a property is owned by a couple then each gets this allowance meaning that £22,600 would be tax free. CGT is the taxed on the remaining profit at 18% for basic rate tax payers and 28% for high rate tax payers. As you can see from the above, there are a lot of considerations and using my team of property tax experts whom are on hand to best advise our clients on how to avoid the payment of capital gains tax. Please note that you will pay CGT on second homes. So, if you have a place in the county and it is not your deemed main residence, as you can only have one, you will pay CGT on that second property that is used as a holiday home.
Section 24 – mortgage interest relief impact and Capital Gains Tax
One of the reasons that many landlords and property investors are looking to sell their property investments is because of the budget changes that cam into effect in 2017/18 known as Section 24. This Government change means that the mortgage interest that was once offset against your property income in full is no longer allowed. As such, the tax relief that may be obtained on mortgage interest is now reduced to just 20%, which is half as a high rate tax payer. I have written an article on Section 24 and mortgage interest relief and how it may effect you as a property investor. I have also provided you with another free downloadable spreadsheet for you to work out how Section 24 may impact on your personal tax position.
How long do I need to live in a property to avoid Capital Gains Tax?
One of the questions I am often asked is “How long do I need to live in a property to avoid paying Capital Gains Tax?”. The reason for this question is because you are only taxed on a property for the time that you no longer live in it. You may have purchased a home to live in but later move and rent out the other, which eventually results in a CGT liability. You do not pay Capital Gains tax on a property that is your main residence. I have written an article of how Private Residence Relief PRR may be used to minimise and potentially avoid capital gains tax. The PRR relief is for the period that you live in the property compared to the time that the property was empty or rented out. One of the benefits of living in a property and Private Residence Relief is that you can also move back into the property. Remember that the time that you have lived in the property counts towards the time that you do not paid CGT. As such, if you lived in a house and moved back into the property then you will pay less CGT. I have written an article on avoiding Capital Gains Tax and moving back into a property.
Transferring a property to a Limited Company
One of the considerations that many property investors and landlords have is to transfer a property to a limited company. The mortgage interest may be offset in its entirety within a limited company so you can see that there is an immediate benefit. There are a few considerations you need to have before you sell your property that is currently in your own name to a Limited Company:
- Stamp Duty Land Tax (SDLT) will be charged as it will be a deemed land transaction. Please do not forget that there is also a 3% additional SDLT charge on the full amount of the property if it has a value of £40,000 or more. As you would expect, I have written an article on SDLT transfers to a Limited Company
- Capital Gains Tax: You will also need to pay CGT if you transfer a property into a limited company if it is not used in your trade activities of business. I have written an article here on this point, and how this tax may also be avoided through incorporation relief. Putting a property into a Limited Company can be a costly exercise without knowing it from a CGT perspective. Please also note that CGT will also be charged if you transfer properties from a partnership into a Limited Company.
- Mortgage and finance: If you have a buy-to-let mortgage in your own name, then you will need to think about how the property will be financed in the Limited Company as you will not be able to transfer the mortgage into the Limited Company.
I have provided property investors and landlords with a CGT calculator, which will show how much CGT is payable and again will show different ways of how you can avoid paying CGT on the disposal of your property investment.
Download our property investment guide here
Capital Gains Tax CGT on gifting properties to children
Before I leave you with your thoughts, it is a consideration children that is looking for a property to live in. I know how difficult it is for children to buy a property and get a mortgage. I also know of the IHT issues that landlords and property investors have. It is possible to transfer a buy-to-let property into a Trust and back out again into your child’s name with the impact of CGT or SDLT. This process is not an easy one to follow, and we would strongly suggest that you use a decent solicitor that specialises in this area. You will also need to ensure that the properties are unencumbered before making such a transfer into a Trust. I have written a separate article on transferring properties to children via a Trust to mitigate CGT, SDLT and IHT.
Enterprise Investment Schemes
We can’t get away from the fact that you can take the taxable gain of say £100,000, which would be taxed at £28,000 (if the CGT annual allowances were used for high rate tax payers). If you invest the gain into an EIS then the CGT is deferred. Not only that but you will also be given a tax reducer of 30%.
In the above example where someone has invested the £100,000 gain into an EIS they would receive £30,000 income tax relief (if they have paid this amount in tax) and get a cheque back from HMRC.
How good would you feel getting a cheque back from HMRC?
One of the key benefits of EIS, albeit they are risky, is that they do spread your investment portfolio and EISs are outside of your estate meaning that they are not taxable under IHT on death.
We have written more details on this here