Property Investors

Reduce Capital Gains Tax (CGT) when selling investment properties, including family


Simon Misiewicz

20th September 2018

By Simon Misiewicz Article relevant to the tax year 2018/19

Common Capital Gains Tax  questions when selling a 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 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?

You may wish to read 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. Read Here for more (opens in a new tab)

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

Capital Gains Tax annual 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 £11,700. If a property is owned by a couple then each gets this allowance meaning that £23,400 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.

How to calculate your Capital Gains Tax liability. Working out your gain

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 then spends £5,000 on improvement costs.

She then sells the property for £120,000 and 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 £11,700. She does not have a tax bill on this profit.

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How long do I need to live in a property to avoid Capital Gains Tax?

Private Residence Relief (PRR)

“How long do I need to live in a property to avoid paying Capital Gains Tax?” This is a common question. You do not pay tax for the period that you have lived in the property. This is just one of many ways to reduce capital gains tax on property transactions.

You may have purchased a home to live in but later move into a new home but rent out the original house. This results in a potential CGT liability. You do not pay CGT on a property that is your main residence. This is important to know when working out your gain.

HMRC’s very own website provides the below summary of the periods that you are absent from the property. These periods will still qualify for Private Residence Relief

  • The time that you lived in the property as your main and only residence
  • The final 18 months of your period of ownership always qualify for relief. This is regardless of how you use the property in that time
  • 12 months you do not occupy your new home when you acquire it because you are not able to sell the old home
  • 12 months you do not occupy your new home because you are waiting for the refurbishment  of the new property to be completed

Other qualifying absences to increase your Private Residence Relief to further reduce Capital Gains Tax

There are other qualifying absences during the time that you owned the main residence as listed below

  • a. absences for whatever reason, totalling not more than 3 years in all
  • b. absences during which you’re in employment and all your duties are carried on outside the United Kingdom (UK)
  • c. absences totalling not more than 4 years when
    • 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

An example of how Private Residence Relief reduces your Capital Gains Tax liability 

You can follow this example or work out your own Capital Gains Tax liability by using our very own calculator tool. Using the same example as above we can see

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£83,333) Private Residence Relief

(£40,000) Lettings Relief (see below)

(£123,333) total reliefs

The reliefs outweigh the capital gain. No tax bill will arise.

PRR From April 2020

One of the big changes was the reduction of deemed residence from 18 months as shown in the above example to 9 months. It will be deemed that the person lived in the property for the first year plus nine months. This means that the person would be deemed to have lived in the property for 1 3/4 years. As such the amount of Private Residence Relief will also be reduced.

Let us see how much this change will have on a high rate taxpayer:

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£58,333) Private Residence Relief

(£40,000) Lettings Relief (see below)

(£98,333) total reliefs

£1,644 gains that become taxable.

A basic rate taxpayer will pay 18% of this gain. A high rate taxpayer will pay 28% of this gain. This means that the buy to let landlord will have a £460.32 tax bill to pay.

Do people have to pay Capital Gains Tax when selling a second home?

People selling a second home will have to pay Capital Gains Tax. This is because you can only nominate one property as your main residence. You can only get one Private Residence Relief on a property. Selling a second home is likely to pay Capital Gains Tax.

There are a number of reasons why people decide to have a second home.

– Purchased a house for a son or daughter to live in whilst away at a university

– A place to stay whilst working away at the weekend to avoid hotels

– Wishing to get away at the weekends as a holiday retreat.

It is a sad fact that these types of people will pay Capital Gains Tax when selling their second home.

Lettings relief (LR) when selling an investment property

You can reduce capital gains tax on a property through Lettings Relief. Before April 2020 letting relief was the lower of the three below elements. This is provided that you let the property during your ownership of the property investment.

  • The capital gains (sales price less purchase & refurbishment costs)
  • Private Residence Relief (PRR) as above
  • £40,000

The lettings relief could not create a negative for you to reclaim tax back from HMRC. You may have lived in a property but moved out. You may have moved a tenant into the property and qualify for the lettings relief.

Lettings Relief and tax changes from April 2020

Another significant change was the amendment to the lettings relief. From April 2020 that lettings relief will only be provided if you lived with the tenant. Sarah previously received the Lettings Relief benefit. From April 2020 she would not receive this benefit as she moved out and a tenant subsequently moved in. Sarah did not live in the property at the same time as the tenant.

Example of Lettings Relief and how it reduces capital gains tax

Let us see how much of an impact the removal of Lettings Relief will have on the above example

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£58,333) Private Residence Relief

£41,667 gains that become taxable.

As a high rate taxpayer that has used up their annual capital gains tax allowances. They will have a tax at 28% of £11,666.76

Our property accountants and property tax advisors are always on hand to help our clients. The sole aim is to build their wealth whilst paying less tax on their buy to let portfolios.

Delayed completions 

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.

Section 24 – mortgage interest relief impact and Capital Gains Tax

The Government change means that the mortgage interest is no longer going tax deductible. The tax relief that may be obtained on mortgage interest is now used as a 20% as a tax reducer. This is in effect halves the tax relief for high rate taxpayers.

We have written an article on Section 24 and mortgage interest relief and how it may affect you as a property investor. We have provided you with another free downloadable spreadsheet for you to work out how Section 24 may impact you.

Transferring a 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 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.

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.

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 CGT 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 CGT 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)
  • trustees
  • partners
  • companies

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 computation is

£200,000 Market Value of the property

£100,000 Original purchase price

£100,000 gain

It is the £100,000 gain that will be considered as part of John’s self assessment CGT return.

Capital Gains calculator UK / CGT calculator

Download your buy to let tax guide here, written by our property accountants

Enterprise Investment Schemes

You can have a taxable gain of say £100,000 giving rise to a tax liability of £28,000. If you invest the gain into an EIS then the CGT is deferred. You will also have a tax reducer of 30% against your income tax.

Let us take a look at an example. Someone has invested the £100,000 gain into an EIS. Let us also assume they have an equal amount of taxable income through paid employment. They would receive £30,000 income tax relief and get a cheque back from HMRC. Would it not be nice to get a cheque back from HMRC?

One of the key benefits of EIS, is that they do spread your investment portfolio. EISs is an investment that sits outside of your estate. This means EIS is not taxable under IHT on death.

It is possible to avoid Capital Gains tax when selling a second home if you invest the gain into a EIS.

I would strongly suggest that you speak with a financial advisor. They will tell you about all EIS investments. You will also be informed by them about the associated risks of EIS investment

Editors comment from Ruban Selvanayagam of PropertySolvers:

We have written a guide for landlords who are thinking about selling one or more of their tenanted properties. It’s been put together by the Directors of Property Solvers. They are accredited at the National Landlords Association (NLA). Property Solvers have over 15 years’ industry experience. They explore the best ways to get the outcome and price you want from the sale.

To read more about selling a tenanted property please click here

How can our property accountants help you reduce your buy to let tax?

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Book a tax call with our property tax specialists using the code “Art33” to get a 33% discount  and reduce capital gains tax on property now – Click Here to book

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