By Simon Misiewicz Article relevant to the tax year 2020-21
Common Capital Gains Tax questions when selling a residential property investment
In this article we are going to answer the following:
- What are your capital gains tax annual allowances?
- How you can use delayed completions to utilise your annual capital gains tax allowances?
- What is the capital gain tax on the sale of a residential property?
- Is capital gains tax payable on the gift of property?
- How long do you have to live in a property to avoid capital gains tax?
- How do I avoid paying capital gains tax on property?
- What percentage is capital gains tax on property?
- Is there a capital gains tax calculator?
- Can I gift my property investment to my children?
- How do I legally reduce capital gains tax on property disposals?
- Does someone selling a second home have to pay CGT?
Before we jump into the detail of how we reduce Capital Gains Tax we first need to understand the basics. Visit the article where we describe what the Capital Gains Tax allowances are. We will also go into the details behind the Capital Gains Tax rates that are applied once the annual allowances are exceeded.
You will typically pay Capital Gains Tax when you sell a residential buy to let property.
When do you avoid Capital Gains Tax?
You do not usually have a Capital Gains Tax bill in the following circumstances
– Gifts between husbands and wives
– Transfer of assets between civil partners
– Donations made to a charity
– If you have Capital Gains Tax losses brought forward from previous years
There may be times when people agree to sell a property sometime in the future. Capital Gains Tax applies upon the agreement of sale rather than when the sale took place.
Transferring a residential property investment to a Limited Company
Landlords may wish to transfer an investment property to a limited company. The mortgage interest may be offset in its entirety within a limited company. There are a few considerations before you sell your residential property to a Limited Company:
- Stamp Duty Land Tax (SDLT) will be chargeable on any deemed land transaction. Please do not forget that there is also a 3% additional SDLT charge on the full amount of the property. This applies where the value of a property is £40,000 or more. I have written an article on SDLT transfers to a Limited Company
- Capital Gains Tax: You will also need to pay CGT if you transfer a property investment into a limited company. This is assuming that the property is not your trade business. Putting an investment property into a Limited Company can be a costly exercise. CGT will also be a tax liability if you transfer properties from a partnership into a Limited Company.
- Mortgage and finance: you will not be able to transfer the mortgage into the Limited Company.
Download your buy to let tax guide here, written by our property accountants
Capital Gains Tax when transferring a buy to let property to a child
Parents may wish to transfer a buy to let or second home to their children. This can be done but they need to be aware that a Capital Gains Tax bill is likely to arise. The Capital Gain will be based on the market value less the purchase price and capitalised items. You will note the words market value. This is to prevent a parent from transferring an asset for less than it is worth.
We have written a separate article for UK landlords wishing to mitigate tax when transferring a property into trust for children. The types of tax avoided are Capital Gains Tax and Stamp Duty Land Tax.
Capital Gains Tax Calculator – £9.95
This CGT calculator will tell you how much is to pay and how to reduce it further.
Buy property from family members
Similarly to the previous section, may be tax implications when you buy a property from family members. The person buying the property may have to pay Stamp Duty Land Tax (SDLT). The seller may have to pay the CGT bill on the disposal. Given that this article is about CGT we will keep our focus here.
I appreciate the article says “may have to”. Let me clarify. If you are a connected person then the CGT bill will be based on the market value of the property and the original purchase price. A connected person is one of many.
- relatives (brothers, sisters and spouses or civil partners of relatives)
Section 286 TCGA 1992 identifies persons with whom we are “connected” for CGT purposes. A taxpayer is connected with his or her spouse. Remember that the term spouse includes a civil partner. A taxpayer is also connected with his “relatives”. “Relatives” include ancestors such as one’s parents or grandparents.
Relatives also include lineal descendants such as children or grandchildren, and one’s brothers or sisters. TCGA 1992, s.286 A taxpayer is also connected with any relatives of his spouse.
These include one’s brothers-in-law or sisters-in-law, they being the brothers or sisters of one’s spouse. Relatives of one’s spouse also include one’s mother-in-law or father-in-law, so these people are also treated as connected persons. Finally a taxpayer is connected with spouses of his relatives.
An example of a son that wishes to buy a property from his father in law
John is the stepfather to Andrew and has moved into the family home with Andrew’s mum. Andrew wishes to buy the property from John, which they agree to transfer the property as a gift. We will ignore the seven-year inheritance tax rules for the purpose of this article.
John values the property as £200,000. He is pleasantly surprised as the property was purchased for £100,000 just ten years earlier. There is a mortgage of £90,000. Al John wants to do is have a nice holiday and pay off the mortgage. They agree on a price of £100,000.
On the face of it, you would assume that there is no CGT to pay by Andrew buying a property from John. This is because the sales price for John is £100,000 and the original purchase price is also £100,000. No gain no less.
Sadly they are close relatives and HMRC will require that the CGT bill computation is
£200,000 Market Value of the property
£100,000 Original purchase price
It is the £100,000 gain that will be considered as part of John’s self assessment CGT return.
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