We will answer your questions about CGT rates and the capital gains allowance
I will take the brave assumption that you are reading this article because you wish to sell an asset. You may be thinking about Capital Gains Tax too.
We will attempt to answer the following questions
– What is Capital Gains Tax?
– How much Capital Gains Tax do you need to pay when selling an asset?
– Is there a Capital Gains allowance to mitigate the implications of tax?
– What are the legal ways to minimise or mitigate CGT?
– When does Capital Gains Tax need to be paid?
– Do I need to tell HMRC about the capital gain?
– Do I need to report the capital gain on my personal self-assessment tax return?
A step by step guide of how to sell assets whilst minimising CGT
1 – Identify an asset to sell
2 – Make sure you time the sale to utilise your annual CGT annual allowances
3 – Ensure you sell assets that a) make a profit and b) make a loss to offset one against the other
4 – Calculate the Capital Gains Tax Liability
5 – Identify ways to minimise CGT
6 – Amend the ownership of the asset as appropriate
7 – Sell the asset
8 – Report and pay CGT
What is the capital gains allowance?
You may be interested in our main article on Capital Gains Tax rates and allowances. You may also be interested to know how more about our services to help reduce your Capital Gains tax liability when you sell a buy to let property investment.
As property tax specialists, we know that Capital Gains Tax is based on the sales process less the purchase price and capitalised refurbishment costs. The annual Capital Gains Tax allowances further reduce this. Please also do not forget that everyone has a Capital Gains Tax annual allowances and at the time of writing was £12,300. Married couples and civil partners each get this allowance, meaning they get £24,600 combined.
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%.
Capital Gains Tax when selling a buy to let
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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.
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.
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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. First of all, you need to ensure that you utilise your annual capital gains tax rate allowances.
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 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 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 Allowance 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 annual capital gains 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 an 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.
You may also be interested in the below relevant articles on reducing capital gains tax liabilities
A special note for those that need to file a 1040 tax return to the US
Now that you have understood the UK tax position of Capital Gains Tax you may now need to consider the US tax position when submitting your 1040 tax return to the IRS.
It might be worth reading the article on Capital Gains Tax that has been written by Purser Tax, a company that helps people save tax across the Atlantic.
Please note that you may have paid tax in the UK but you may need to pay additional tax in the US to the IRS. Please do not worry as there is a tax credit available when you submit a 1040 tax return using the IRS 1116 form Foreign Tax Credits.
What are the possible Capital Gains Tax changes in 2021?
In July 2021 Rishi Sunak the chancellor of the exchequer requested the Office of Tax Simplification (OTS) a review of the capital gains tax system. It is fair to say that the Capital Gains Tax review – first report: Simplifying by design proposes a number of changes to the current Capital Gains Tax system.
Capital Gains Tax and divorce or separation
There are special rules that apply when you are going through separation or divorce. You benefit from Capital Gains Tax exemption f you transfer assets whilst you are married. This means there are no CGT liabilities when transferring assets between husband/wife or civil partners.
However, you may have to pay CGT if you separate or divorce and then transfer assets been you. It is important to get advice from a CGT tax specialist before you separate.