By Simon Misiewicz
Are you looking to sell some of your residential property investments?
Are you looking to reduce your CGT bill?
The problem — 28% CGT is a lot of tax to pay
I wrote an extensive article about the budget changes and how many residential property investors, especially higher rate taxpayers, have been targeted by George Osborne in the following ways:
- The reduction of mortgage interest relief to a basic rate taxpayer level of 20%
- The removal of the 10% wear and tear allowance
- The new 3% stamp duty land tax (SDLT) surcharge for additional properties
There are many other issues identified within the article but the above three “features” can be crushing to the point where you can make a loss on your property portfolio and still pay tax. This, in my opinion, is wrong but we have to work with it or leave the sector.
If you are thinking of leaving the residential property investment market then you need to consider capital gains tax (CGT). George Osborne also recently announced that CGT rates will be decreased from 18% to 10% for basic rate taxpayers and from 28% to 18% for higher rate taxpayers. On the face of it, you may think this is good news, but the devil in the detail reveals that George has singled out residential property investors again and stated that these discounts do not apply to them. Therefore residential property investors will still pay 18% CGT if they are basic rate taxpayers and 28% CGT if they are higher rate taxpayers.
You could be forgiven for feeling rather paranoid about these tax changes and the way the government seems to be targeting landlords. Don’t forget, however, that each person still gets an £11,100 capital gains exemption for 2016-17.
Ways to minimise your CGT liability
The below list is based on non-trading assets, i.e. residential property investments. There are other allowances that may be claimed for trading business assets, which I have detailed in another article.
- Use your spouse’s capital gains exemption and allowances using a deed of trust
- Spread the property sales over time to utilise your annual capital gains exemptions
- Contribute towards your pension to get income tax relief to reduce the overall tax burden
- Invest in Venture Capital Trusts (VCTs)
- Invest into an Enterprise Investment Scheme (EIS)
- Invest into a Seed Enterprise Investment Scheme (SEIS)
Many property investors do not use their spouse’s capital gains exemptions. You may be in a position where you are a higher rate taxpayer and your spouse either pays no tax at all or is a basic rate taxpayer. As such you could be losing out on their £11,100 capital gains exemption and paying 10% more tax than you need to.
There is a way to split the percentage of ownership to ensure that you utilise your personal capital gains exemption while minimising the percentage of CGT payable. I would suggest that you speak with your accountant about this.
If you spread your property sales over time then you could take advantage of the £22,200 in capital gains exemptions (assuming you are married) available each year.
If you invest the entire gain into one of the last four options then you would be able to mitigate the entire CGT liability, provided you meet the various requirements identified within each type of investment.
Please note that I am not suggesting that you invest in any type of investment specifically, rather showing the tax reliefs that may be obtained if you choose to do so. There will be a degree of risk with any type of investment, which is mirrored by the below income tax reliefs. The higher tax relief often relates to the additional risk you take.
You should speak with an FCA regulated financial adviser before embarking on any investment.
Income tax reliefs for each type of investment
In addition to the CGT mitigation, you will also receive income tax relief on the investment that you make as follows:
- 30% income tax relief for VCT investment up to a maximum investment of £200,000
- 30% income tax relief for EIS investment up to a maximum investment of £1,000,000
- 50% income tax relief for SEIS investment up to a maximum investment of £100,000
Please note that pension contributions will also provide you with income tax relief — my previous article provides more details on this.
I also wrote a more detailed article on investing in EIS.
Next steps — contact us to minimise your CGT liability
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.
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