A to Z of CGT – The Basics of Capital Gains Tax
With Section 24 the hot topic for landlords in recent times, many landlords have been considering their options. Whilst there are possible ways to mitigate the changes, some landlords have come to the conclusion that they wish to sell their properties. This can however attract further tax as you would be exposed to the Capital Gains Tax (CGT) regime.
Capital Gains Tax (CGT) is a crucial consideration if you are a landlord holding investment property.
To introduce you to the Capital Gains Tax (CGT) system, we break this down into an A to Z format!
CGT A to Z:
A ssets you own, such as property and other investments, may attract capital gains tax when they are sold or disposed of.
B ecause there are many exemptions and reliefs available, you may not have to pay capital gains tax.
C apital gains are essentially, the profit you make when selling an asset. In the most simplistic form, if a property was purchased for £100k and sold for £300k, there is a capital gain (before exemptions, reliefs and other reductions) of £200k.
D isposals of assets does not cover just selling a property. Property being gifted or swapped still counts; a disposal attracts the potential of paying capital gains tax.
E xempt assets can be discounted however. For instance, your own residence is usually exempt from capital gains tax, although if the property has been let, it is worth seeking advice here.
F amilies cause confusion! Gifting a property to your spouse is usually free of capital gains tax, but to other family members, capital gains tax would become potentially chargeable.
G ains are pooled together on your self assessment tax return, and it is dependent on the sale date as to which tax year it falls into. A sale on 28th December 2018 would fall in the 2018/19 tax year.
H M Revenue and Customs expect the tax to paid by the 31st January following the end of the tax year the gain arose for those completing self assessment tax returns. For the example in section G above, any tax owed would be payable by 31st January 2020.
I nheriting property is something to be wary of, in that although there is no capital gains tax when you inherit a property, there may be capital gains tax to pay when the property is then subsequently sold.
J ustifying transactions may be required should HMRC enquire into your tax affairs, and it is always important to keep records relating to the purchase and sale of a property.
K eeping up to date with law changes is important when buying and selling investment property.
L aw changes recently include the reduction of the final period exemption and changes to letting relief
M inimising your tax liability and effective planning is important in ensuring you do not pay too much CGT.
N o taxpayer should forget that you are entitled to an annual exempt amount of £12,000 (in the 2019/20 tax year). Any gain below this will be free of capital gains tax. The amount of gain exceeding this limit are subject to capital gains tax.
O wners who hold property with, for instance, their spouse, would need to make a gain of over £24,000 in the 2019/20 tax year to become subject to capital gains tax, as each taxpayer would have their own annual exemption.
P arents wishing to gift properties to their children must consider capital gains implications, and may be well advised to combine this with an inheritance tax appraisal.
Q uite a number of taxpayers do not realise that if a loss is made when selling an investment property, this still needs to be reported to HMRC.
R egistering this loss is also important as it can be used to offset against future capital gains.
S elling at the right time can help delay the payment of capital gains tax (CGT). If you exchanged contracts on the 6th April, rather than 5th April and earlier, tax payment could be delayed by one year. This is due to the 6th April being the start of the new tax year.
T ax is charged on capital gains for individuals’ properties at the rate of either 18% or 28%, and the rate is dependent on the level of your other taxable income.
U nlike the above, if you are fortunate to qualify for entrepreneurs’ relief, the rate of tax would be 10%.
V ariances also apply to trustees where a rate of 28% is applied.
W orking through your past records is important to ensure you record details of any improvements you have made to the property. These can have a beneficial impact when calculating your capital gain.
X -factor ! Ok, so we’ll have to miss this letter out, as it is so difficult! However, do not miss out anything on your tax return relating to the property sale. HMRC very much have landlords in their sights at the moment, and are closely monitoring activities, proven by the past Property Sales Campaign, and of course, the current Let Property Campaign.
Y ou should ensure all relevant deductions and allowances have been claimed, and it is worth seeking professional advice regarding lettings relief if you let a property to tenants which used to be your own home.
Z apping your CGT bill requires careful planning and consideration. For further assistance or a capital gains tax appraisal, please do not hesitate to contact RITA4Rent.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.