Are you looking to sell any of your poorly-performing assets due to the mortgage interest relief cap issue?
Are you looking at ways to minimise Capital Gains Tax (CGT)?
CGT is a tax cost that reduces the amount of net cash that you will eventually receive upon selling your property. CGT is based on the sales price, less purchase price (and associated purchase costs) less any capital cost of refurbishment.
As we highlighted in the previous article that George Osborne in 2015 reduced the CGT rates from 18% to 10% for basic rate tax payers and from 28% to 20% for high rate and additional rate tax payers.
Sadly for people disposing of property investments they are still expected to pay the old rates of 18% (basic rate tax payers) and 28% (high rate tax payers).
For 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.
Later in the same year, she then sells the property for £120,000 and pays the estate agent £1,500 and 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.
Luckily for Sarah, in this example the profit of £10,000 is less than the CGT tax free allowance of £11,300. She therefore does not need to pay any tax on this profit.
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.
Please note that it is very important that you declare any profits that you have made by the sale of your property. HMRC are cracking down on the evasion of tax, as we have explained previously in our article.
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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. It must have been your only or main home at some point during the time that you’ve owned it.
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.
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There are many ways in which you can reduce your CGT liability further, as we have explained in a number of our articles:
- Mitigate Capital Gains Tax with EIS Investments
- Transferring Your Main Home Into Trust For The Benefit Of Your Children
- Capital Gains Tax (CGT) Leaving The UK and Non-Residents
- Gifting Buy To Let Properties To Children Without Capital Gains Tax (CGT) Using Trusts
- Transfer assets between spouses to maximise CGT annual allowances and lower tax bands
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