Are you looking to sell a property and are you worried about capital gains tax (CGT)?
The problem — 28% CGT is a lot of tax when selling a property.
Given the recent budget changes, you may be thinking about selling one or more investment properties. Section 24 mortgage interest relief means that property investors are likely to pay more income tax. The unfortunate thing is that as property prices increase so does the CGT payable. When you sell and if you’re a higher rate taxpayer you’ll pay 28% on any gains. This is despite George Osborne decreasing CGT rates for other types of assets.
Each person owning the property will get a CGT allowance of £11,700 for the year 2018-19. If you are married and the property is in one person’s name only, then it is a good idea to use a deed of trust at least a day before the sale. You can claim two allowances (couples only). If this is applicable to you please read my article on this. It is worth speaking with one of our property accountants to see how a deed of trust can reduce your income tax as well as CGT.
Private Residence Relief (PRR) & Lettings Relief
I previously wrote an article about Private Residence Relief (PRR), which demonstrated that tax is only chargeable on the periods that you were not living in the property. I also outlined a number of reliefs as follows:
- 0% tax on the time you lived in the property
- 0% on the last 18 months of ownership (deemed to have been living there even if rented out)
You would also get lettings relief as shown below (the lower of):
- the amount of PRR already calculated, or
- £40,000, or
- the amount of any chargeable gain you make because of the letting (calculated as a fraction of the gain – the fraction being the period of letting/divided by the period of ownership).
This will help you to significantly reduce your CGT liability. Please ensure that you speak with one of our property accountants to help you reduce your CGT liability.
Download your property tax guide here, written by our property accountants
Example of CGT when selling a property
You bought a house for £200,000 in December 2002 and sold it in December 2018 for £350,000. This means that you owned the property for 16 years. You lived in the property as your only or main residence from December 2002 to December 2008 (six years). This means that you have made a nice profit of £100,000.
As you lived in the property then the PRR would decrease the £100,000 profit by £46,483. The lettings relief is also applied but capped at £40,000 since both the gain and PRR is greater than this amount. Nevertheless, the total deductions to the gain are £86,843. The taxable gain is now reduced to £13,157.
This is further reduced by the annual CGT allowance for one person of £11,700. This means that the taxable gain is just £1,457. As a high rate tax payer, the CGT is now £408. If the property investor had spoken to one of the property accountants the £408 CGT liability could have been avoided by using the deed of trust.
If the property had not been lived in at all then the £100,000 gain would have a CGT liability of £24,724.
I hope that you can see why it may be advantageous to move into a property for legitimate reasons before it is sold.
Move back into the property to get additional reliefs
You can also reduce your CGT liability if you move back into a property which you previously had as your main home.
You will need to nominate your primary residence if you have a second home that you now live in. However, HMRC does provide you with an allowance to extend the PRR of your first home. The qualifying periods of absence are:
- a. absences for whatever reason, totalling not more than three years in all
- b. absences during which you are in employment and all your duties are carried on outside the UK. The distance from your place of work prevents you living at home, or your employer requires you to work away from home in order to do your job effectively
- c. absences totalling not more than four years when the distance from your place of work prevents you living at home or your employer requires you to work away from home.
You will keep the exemption for absences b. and c. if you cannot return to your house afterwards because your existing job requires you to work away again. The absences at b. and c. will also apply if the employment was that of your spouse or civil partner.
Example: You bought a house in 1984 and used it as your only or main residence. In 1985 your employer required you to work abroad and you did not come back to the house until 1990. You lived in the house again as your only or main residence until you sold it in 2013. You are entitled to full relief.
This increases your PRR and therefore reduces your CGT liability when selling a property, even if it was rented whilst you were absent.
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