An article relevant to the tax year 2020/21
You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord. Opens in a separate tab.
What is reg capital gains tax allowance?
Capital Gains Tax is based on the sales process less the purchase price and capitalised refurbishment costs. This is further reduced by the annual Capital Gains Tax allowances. Please also do not forget that everyone has a Capital Gains Tax annual allowances and at the time of writing was £12,300. If a property is owned by a couple then each gets this allowance meaning that £24,600 would be tax-free.
You will need to speak with a property tax specialist to help you reduce capital gains tax on property sales.
Using your spouses Capital Gains Tax annual allowance to reduce your tax bill
Please read our article on how to reduce Capital Gains Tax by using your spouse’s annual allowance. This involves transferring part of the buy to let a property to a spouse or civil partner. That way they get their annual capital gains tax allowance to avoid paying tax. You will need to deed of trust and a form 17 to be sent to HMRC. The article will explain more.
What is the Capital Gains Tax rate for 2020/21?
As you can see that basic rate taxpayers have a capital gains tax rate of 18%. A high rate taxpayer has a capital gains tax rate of 28%.
How is Capital Gains Tax calculated?
Landlords disposing of their investment properties are expected to pay an 18% tax bill as a basic rate taxpayer. This increases to 28% for high rate taxpayers.
Example of how Capital Gains Tax is calculated
Sarah buys a property for £100,000 and incurs £500 legal fees and other associated finance arrangement fees of £2,500. She spends £5,000 on improvement costs.
Sarah sells the property for £120,00. She pays the estate agent £1,500 and solicitors £500.
£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 treat these incorrectly.
The profit of £10,000 is less than the CGT tax-free allowance of £12,300. She does not have a tax bill on this profit.
Any excess gains over the £12,300 capital gains tax allowance would be subject to 18% CGT rate for basic taxpayers and 28% for high rate taxpayers. The same rate is also applied to additional tax ratepayers.
If you want to know more then please read our “buy to let tax tips for UK landlords” article
Download your buy to let tax guide here, written by our property accountants
Moving properties into a limited company
Due to Section 24 mortgage interest relief cap, many UK landlords will be thinking about moving their properties into a limited company. There are two issues with the movement of a buy to let property into a limited company.
Moving properties into a company and Capital Gains Tax
The first tax issue is the potential CGT of moving the property to a company. This is because you are technically selling an asset from your personal name into a limited company. We must remember that a limited company is a separate entity. The sale becomes a taxable transaction for Capital Gains Tax.
Moving properties into a company and Stamp Duty Land Tax
The second tax issue is the potential SDLT of moving the property to a company. This is because, again, you are technically selling an asset from your personal name into a limited company. We must remember that a limited company is a separate entity. The sale becomes a taxable transaction for Stamp Duty Land Tax.
We have identified in our other article the ways to mitigate CGT and SDLT when moving property to a company.
How to reduce capital gains tax?
You may wish to read another one of our articles where we discuss how to reduce capital gains tax when selling a buy to let property.
Ways of reducing Capital Gains Tax when selling a buy to let property
There are many ways in which you can reduce Capital Gains Tax when selling a buy to let property.
Using Private Residence Relief (PRR) and Lettings Relief (LR) to reduce CGT
Many UK landlords used to live in a buy to let property. I am sure that many people have emotional attachments to property and it makes it easier to rent the property. The one benefit of previously living in the property is Private Residence Relief (PRR), which reduces the Capital Gains Tax when selling a property. PRR is the period that you lived in the property and means that you do not pay CGT on that period.
Transfer a buy to let property via a trust to a child
One of the ways to minimise Capital Gains Tax and Inheritance Tax is to transfer a property from your personal name to a child. Using a trust allows you to mitigate Capital Gains Tax. This is because you are using your Inheritance lifetime allowance rather than your Capital Gains Tax annual allowance.
Transfer a buy to let property to a spouse
There are two main advantages of moving a buy to let property to a spouse
– Reduce income tax liability especially of one person is a high rate taxpayer and the other a basic rate taxpayer
– Utilise two lots of Annual Capital Gains Tax allowances
As this article is primarily focused on Capital Gains Tax we will focus on this element. We discussed in this article whereby a deed of trust allows you to move the beneficiary entitlement to a spouse. This is a simple document that allows you to then sell a property to a third party.
£12,300 1st Capital Gains Tax Allowance
£12,300 2nd Capital Gains Tax Allowance
£24,600 Capital Gains Tax Allowances before you pay tax when selling a buy to let property to a third party.
Invest the gain into an Enterprise Investment Scheme (EIS)
Many UK landlords do not want to pay Capital Gains Tax when they sell a buy to let property. This is where EIS investments come into play. It is possible to invest the taxable gain of a property into an EIS and delay CGT altogether.
For example, John sells a property as follows:
£100,000 sales price
(£80,000) purchase price
(£12,300) less the CGT annual allowance
£7,700 taxable gain which may be taxed at 18% as a basic rate taxpayer and 28% for a high rate taxpayer.
By investing the £7,700 into a EIS he could avoid paying the CGT liability.
The added benefit of an EIS is that you also can get 30% income tax relief on the investment made.