Avoiding Capital Gains Tax On Property UK

Avoiding capital gains tax on property UK

18 Mar 2020

Capital Gains Tax may be charged on the profits you make when selling, gifting, transferring or exchanging certain assets like shares, collective investments, personal assets worth £6K or more, and property that isn't the main residence.

Higher-rate taxpayers pay CGT at 20% on gains from investments and 28% on gains from residential property. The rates reduce to 10% and 18% for basic-rate taxpayers. 

CGT is charged if you sell, exchange, gift, or otherwise dispose of an asset and make a profit or 'gain'. In terms of costs, unless you bought, you will usually need to consider the asset's market value when you acquired it, like from your spouse or civil partner. In that case, you would use the purchase cost or value when buying.

If you are selling your asset, whatever you pay for improving or adding value to your asset, you can deduct from the total. In addition, you deduct the incidental cost of buying a property in the calculations related to capital gains tax on the property.

Typical costs include legal expenses and estate agents' fees for property, and broker's commission on the purchase and sale of shares.

There are many ways to lower CGT; however, it can be highly complex, and, without expert advice, there's a risk you could end up paying it unnecessarily. So here are some ways to avoid capital gains tax on property.

What is Capital Gains Tax?

CGT was first introduced in the UK in 1965. The liability may arise when a chargeable person makes chargeable disposal of a chargeable asset. A person becomes chargeable to CGT either when they are an individual who is a tax resident in the UK or is the personal representative of a deceased person.

You may have to consider it when buying or selling real estate. For example, it is payable when you sell an asset which has increased in value since you bought it.

The rate varies based on multiple factors, such as your income and the size of the gain. For example, capital gains tax on residential property maybe 18% or 28% of the gain (not the total sale price).

Usually, you don't have to pay CGT when you sell the main home. However, in certain other circumstances, you may have to pay. Like if the home includes a lot of land or additional buildings spread over 5000 square metres or when you sublet a part of the property.

In addition, you may have to pay for the home exclusively used for business purposes or if you bought it for gains, or when another house is considered the main residence. 

How To Avoid Capital Gains Tax On Second Homes In The UK?

First-time buyers purchasing properties costing up to £500K get a stamp duty discount on the first £300K. There are other schemes where you can get more reasonable rates on mortgages if you buy for the first time, but those selling their first home and having many homes need to pay taxes within the given time.

Otherwise, they may face a fine with interest added to the original sum because capital gains on the sale of a home are taxed at different rates than income tax.

  • CGT isn't just declaring your gain and applying the applicable rate. Firstly there is the annual CGT allowance, and if the amount of profit you can make before CGT is applied is more than the limit, you need to pay. However, if your gains are under the limit amount in the tax year, there is no CGT liability. 

  • You can also transfer assets between partners in a marriage or civil relationship to help reduce your CGT liability. 

  • Some of the other methods how to avoid capital gains tax on second homes in the UK are given below- 

  • If you are a landlord, you can apply to get relief if the property you're selling was your only or main residence at some stage in the past years. For example - one can get the tax relief if the property was the main residence in the last nine months before the sale. 

  • It is useful in conditions where a person has lived in a house for a decade and lived in a second home for just a year or two – in such a condition; he will not have to pay the tax for all the years he lived in the first home. 

  • You can claim to get the annual CGT allowance just like the personal allowance on your income. It is called the annual exempt amount, and it currently stands at £12,300. So, if you made a single capital gain of £20K in a year from selling a rental property, a maximum of £7,700 of that gain would be taxable, as the rest would fall within your allowance.

  • You can deduct the specific costs spent on estate agents, solicitors fees, stamp duty, survey/valuation costs and costs related to repairs and improvement work in the house. The costs are covered under personal allowance, and you do not pay tax on the amount you spend on the maintenance of the house.

  • As the tax only applies to sales of residential properties, many buy-to-let landlords are setting up limited companies to handle their portfolios to reduce their tax liability. Profits made on selling properties through a limited company are covered by corporation tax( at 19%) which is less when compared to CGT at 28%. 

You can nominate another main residence to avoid CGT on BTLs. In addition, there is no limit to the number of times you can change the main residence, a process known as flipping, but one must do so within two years of the combination of homes changing.

As a large part of CGT is based on one's annual income, if you are a higher band taxpayer but your partner doesn't work, you can sell the property in their name to lower the rate of CGT as they will be classed as a base rate taxpayer.

When you refinance a property, you refinance it based on its current value, and you can avoid CGT in that case. A property worth under £650k gifted to a child gets exemptions; it can help you avoid CGT and escape Stamp Duty and Inheritance Tax.

Capital Gains Tax On Property Calculator

If you are selling a property, it is wise to work out your HMRC Capital Gains liability before selling. By doing this, one can reduce the amount to pay.CGT calculator is a free tool that you can use. It can help you calculate the capital gains tax on property.

Before using the Capital gains tax on property calculator for real estate investments, gather information like – 

  • Get all the original completion statements of the property sale or purchase.

  • When refurbished, get all your capital costs, including windows, doors, kitchens, bathroom suites, and others. These are costs not mentioned in the self-assessment tax return.

  • Mention the dates when you bought the property, lived in, rented and sold it. It will be useful if you claim the Private Residence Relief on the property sale.

  • Estimate your taxable income for the tax year you sell the buy to let property. 

How Do You Avoid Paying Capital Gains Tax In The UK?

How to avoid paying capital gains tax? Since the rate at which you pay CGT is dependent on your income tax band, reducing your income tax rate can reduce your capital gains tax

If you're expecting one of your BTLs to remain unoccupied for a prolonged period, it is certainly one way you can reduce any potential CGT bill. 

If you inherit an asset, there is no CGT liability until you decide to sell it.

There are other types of reliefs like rollover relief applied when trading assets are sold and replaced with new assets using the proceeds from the sale.

CGT also applies to gifts you may receive from people other than your spouse or civil partner. Also, one can carry forward any losses that one has not used to offset the gains. 

Annual Capital Gains Tax Allowance

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (the Annual Exempt Amount). The Capital Gains tax-free allowance is £12,300.

In the 2022- 23 tax year, landlords and investors who sell a residential property will get 60 days (up from 30) to complete the capital gains tax process. In addition, buy-to-let mortgage interest tax relief is reduced to zero. Instead, the landlords will get a 20% tax credit on mortgage interest payments.

It is worth noting that the mortgage limits apply to individuals, not companies. That is why many people purchase buy-to-let properties through a limited company, where they are effectively taxed on profit rather than income.

How To Avoid Capital Gains Tax On Inherited Property UK?

How to avoid capital gains tax on an inherited property? Again, it depends upon many factors. You don't have to pay capital tax on inheritance properties that were either made your primary residence or weren't sold for a greater profit than your allowable costs.

To know How to avoid capital gains tax on inherited property, you need to see if the profit generated from the sale is less than your CGT allowance; then, no tax needs to be paid. In addition, it's important to note that profits are worked out with gifts and inheritance properties based on the value of the home when you receive it compared to when you sell it.

Avoiding Capital Gains Tax On Buy To Let Property UK

Capital gains tax only applies when you sell your investment property for an overall profit above the limit set by the government each year. However, if you have an overseas asset, such as a holiday home, you may still have to pay capital gains tax. It applies when you consider the UK your permanent home, but you make capital gains from selling property overseas.

To avoid paying capital gains tax on buy to let property, you can consider joint ownership, deduct maintenance costs, set up a company, and use the tax-free allowance. 

Also, you need to see if you are entitled to private residence relief or letting relief. Then, you can live in your buy to let as the main residence to avoid CGT.

When Is Capital Gains Tax Due?

If you sell UK land and property, in that case, you may also need to report the disposal of the home to HMRC on a separate return and pay CGT within 60 days of the date of completion.

If your property is furnished and used as a second home or is between lets, you will also have to pay the council tax. However, if you own or rent a property that becomes empty and unfurnished, you can apply for a 100% council tax discount for one month from when it first became empty and unfurnished.  

How Much Will I Pay in Capital Gains Tax?

  • How Much Will I Pay in Capital Gains Tax? -For the 2022/2023 tax year, one will be paying capital gains tax based on the given rates:

  • 10% (18% for residential property) for your entire capital gain if your overall annual income is below £50,270.

  • 20% (28% for residential property) for your entire capital gain if your overall annual income exceeds the £50,270 threshold.

  • Individuals have a £12,300 capital gains tax allowance. It means your capital gains up to £12,300 are tax-free.

How To Reduce Your Capital Gains Tax Bill?

Make maximum use of tax-efficient schemes. Many circumstances have been discussed to know how to reduce your capital gains tax bill on properties in the above section; however, for other assets, it mainly depends on the profits you make, so to reduce the Capital gains tax bills, you need to maximize the use of losses and use exempt wrappers.

In general, the capital gains tax paid on the sale of real estate property can be reduced by using the CGT allowance, gifting assets to a spouse or transferring property within the family, reducing taxable income, contributing to a pension or spreading gains over the tax years. 

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