Forward Planning is the Key to Selling Your Property
Are you thinking of selling or gifting a residential or commercial property? Before you do, it is worth considering how you can minimise any Capital Gains Tax liability that may arise from the sale.
Capital Gain Tax (CGT) is a tax on the profits you earn when you dispose of an asset that has increased in value. Some types of assets can be exempt and everyone gets an annual exemption. For 2021/22 this is £12,300 per person, which means you can gain up to this amount without any tax being due.
When it comes to property, an asset disposal can mean either a sale or the gift or transfer at undervalue of an asset. This means many people can be affected by CGT including second homeowners, landlords, couples getting divorced, trusts and estates.
CGT is not usually an issue when you sell your main home, provided you meet certain criteria. This is as a result of Principal Private Residence Relief (PPR).
However, if you are selling a property which has not always been your main home during ownership, then CGT may apply. CGT also comes into play if the property has been used wholly or partly as an investment or for business use. The CGT rate varies depending on whether the property is commercial or residential and whether you are a basic or higher rate tax payer. If the property has been used for business, you may be able to claim Business Asset Disposal Relief (BADR). This will allow any gain to be charged at 10%.
Since April 2020, UK taxpayers disposing of UK residential property and making a capital gain have been required to calculate, report and pay CGT within 30 days of completion of the sale. Since then, the deadline has been increased to 60 days.
So what planning measures can you take to reduce any CGT liability?
Increase Available Annual Exemptions
Since CGT is exempt on transfers between spouses, one option is to put the property in joint ownership prior to selling. By gifting half of the property to a spouse or civil partner on a ‘no gain/no loss’ basis, you can potentially make use of each partners CGT allowance, allowing a taxfree gain of £24,600 (2021/22 level). If the spouse is a basic rate taxpayer, there may also be further CGT savings on gains over this level.
It is important to seek appropriate legal advice to ensure the transfer of property is carried out correctly. You should weigh up any associated professional fees against the potential reduction in CGT.
Reduce the Tax Rate Payable
Basic rate tax payers pay CGT at a lower rate (either 10% or 18% depending on the property type). It might therefore be favourable to reduce your income or increase the basic rate threshold, eg by making pension contributions or charitable donations, in the year of disposal.
Consider Capital Losses and Timing of Sales
Capital losses made on other assets in previous tax years, or in the year of the property sale, can be used to offset a capital gain. This means that the timing of the disposal of assets can have a significant impact on the amount of CGT due.
CGT can arise if you gift a property to anyone other than a spouse or civil partner. One way to avoid incurring an immediate CGT charge is to make use of a discretionary trust. The transfer in and out of a trust allows the capital gain to be ‘held over’ to those receiving the asset. If the property is sold at a future date, CGT may then be payable.
When the property is transferred out of the trust, each person receiving the asset will have their own annual exemption. This can significantly reduce the overall CGT when compared to the original owner selling the asset, when only one annual exemption would be available.
Discretionary trusts have their own tax regime. Once again this, along with the professional fees to set up the trust and transfer property, should be considered alongside any potential tax saving.
In summary, there are many things to take into account when selling a property. If you are able to plan the disposal, then there is potential to substantially reduce your CGT bill. You will, however, need to be aware of professional costs and other tax consequences of any action you take. Please do get in touch with us for advice on all the options available and how they apply to your individual circumstances.