By Louise Misiewicz Article relevant to the tax year 2018/19
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. However, we realise that people will have a desire to sell properties because it is costing them money. This means they should be looking at ways of reducing Capital Gains Tax (CGT).
We suggest to our clients that selling some properties to pay off their mortgages would be a good way of mitigatSectiontino 24 mortgage interest relief.
For some property imnvetsors and landlords this could mean either:
- selling single lets and buying HMOs or holiday lets (the latter not affected by Section 24) or
- 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 are seeing a lot of high rate tax payers with a current liability of 40% paying up to 135% tax on their property portfolio because of Section 24.
CGT is based on the sales process less the purchase price less the capitalised refurbishment costs less the annual CGT allowances. Please also do not forget that everyone has a CGT annual allowances and at the time of writing was £11,700. If a property is owned by a couple then each gets this allowance meaning that £23,400 would be tax free.
How to calculate your CGT liability
CGT is the taxed on the remaining profit at 18% for basic rate tax payers and 28% for high rate tax payers. CGT is property investment remain at these rates. George Osborne reduced CGT for other types of assets but not for property investments.
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 also note that you will also pay CGT on second homes. An example is where you live in a property in the north and you have a flat in London for work purposes.
Section 24 – mortgage interest relief impact and Capital Gains Tax
The Government change means that the mortgage interest that was once offset against your property income in full. This is no longer going to be the case. As such, the tax relief that may be obtained on mortgage interest is now reduced to just 20% as a reducer. This is in effect half the tax relief that a high rate tax payer once benefitted from
We have written an article on Section 24 and mortgage interest relief and how it may affect you as a property investor. We have provided you with another free downloadable spreadsheet for you to work out how Section 24 may impact you.
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?”
You may have purchased a home to live in but later move and rent out the other. This results in a CGT liability. You do not pay CGT on a property that is your main residence.
We 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 pay CGT. 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. There are a few considerations before you sell your property to a Limited Company:
- Stamp Duty Land Tax (SDLT) will be chargeable on any 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. This is assuming that the property is not your trade business. We have written an article here on this point. 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 a tax liability if you transfer properties from a partnership into a Limited Company.
- Mortgage and finance: 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
It is a consideration children that are 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. Once the property is in trust it may be put into your child’s name. This approach also avoids the impact of CGT or SDLT. This process is not an easy one to follow. 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.
We have written a separate article on transferring properties to children via a Trust to mitigate CGT, SDLT and IHT.
Enterprise Investment Schemes
You can have a taxable gain of say £100,000 giving rise to a tax liability of £28,000. Assuming CGT annual allowances were used. If you invest the gain into an EIS then the CGT is deferred. You will also have a tax reducer of 30% against your income tax.
Let us take a look at an example. Someone has invested the £100,000 gain into an EIS. Let us also assume they have an equal amount of taxable income through paid employment. They would receive £30,000 income tax relief and get a cheque back from HMRC. Would it not be nice to get a cheque back from HMRC?
One of the key benefits of EIS, albeit they are risky, is that they do spread your investment portfolio. EISs is an investment that sits outside of your estate. This means EIS is not taxable under IHT on death.
We have written more details on this here