Selling your property? Here are three ways to reduce your CGT bill
PUBLISHED: 13:31 09 September 2019
On the surface, Capital Gains Tax (CGT) seems simple, but the costs involved could prevent you from replacing one comparable property with another. Here, Jon Hook details some of the CGT reliefs available.
On the surface, CGT (Capital Gains Tax) looks simple: you pay tax on the difference between what you paid for the asset (together with any capital costs of improving it) and the net proceeds from selling it. You deduct the small annual exempt amount (£12,000 for 19/20) and then pay tax on the result, at 28pc for residential property and 20pc on most other assets - the assumption here is that the gains fall into the higher bracket for the individual concerned; otherwise the rates are 18pc and 10pc.
In reality, CGT is basically a tax on inflation. This has been particularly the case recently as the rate of property price inflation has outstripped normal inflation.
Basically, this could mean that if you sell your long-held investment property, the CGT that you will incur will prevent you from replacing it with another comparable property.
Unfortunately for most property investors, there is no 'rollover relief' where upon selling your property and replacing it with another, you effectively defer (or 'rollover') the capital gain. The only instances where this can happen is where the owner (or his company or partnership) uses the property for the purpose of carrying on a trade.
Despite this, here are some of the CGT reliefs available to private landlords:
Main residence relief:
If the property has been your principal place of residence (PPR) for the whole of the period of ownership, there is no CGT to pay.
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If occupied as your PPR for part of the time, the gain can be time apportioned, hence reducing the taxable gain.
Another PPR relief allows 'deemed' relief for the last 18 months of ownership if the property was the taxpayer's main residence at some point during the period of ownership. Unfortunately from April 6 2020, this reduces to nine months.
Another relief which is going to be effectively scrapped from April 6 2020 is 'lettings relief', which can add up to a further £40,000 in CGT relief. It is determined by a complicated calculation where the amount of relief available in a nutshell is the lesser of either £40,000, the PPR relief (the combination of actual and deemed occupation) and the gain accrued whilst the property was let. However, this relief will still be available in the rare situations where the owner occupies the property at the same time as the tenant.
An important planning point to bear in mind is making an 'election' to HMRC as to which property you want to be treated as your PPR. You have two years from when there is a change in your combination of residences to put the election in. So, for example, electing your flat to be treated as your main residence (even though it has never actually been your main residence) can save tax, even if only for the last months of ownership. Although this seems crazy, HMRC allows it... so you may as well use it!
Switching to short-term holiday accommodation:
In making this 'switch' and by meeting the qualifying conditions, you can enjoy Entrepreneurs' Relief which basically makes the property a trading asset and its sale, comprising part of the sale of a 'business', enjoys the favourable ER tax rate of 10pc. The best thing about switching, though, is that the gain is not pro-rata'd for the change in use: you only need to ensure that the change occurs at least two years prior to sale.
It may seem obvious, but any current or previous year capital losses can be offset against current year capital gains. This may be bad investments, such as shares you lost money on and have a 'negligible value'. Even if you have made a loss it is important to report it because there is now a four-year time limit since self-assessment came in in 1996. Any losses incurred prior to 1996 do not have a time limit set on them. So, as evidenced above, there are a number of ways to mitigate your CGT bill if you are a private landlord but the key point to note if thinking of selling in the near future is to bear in mind the deadline of April 5 2020, after which some reliefs will be lost - possibly forever.
This column is sponsored by Norwich Accountancy Services.