If you are considering the sale of your investments, how do you avoid capital gains tax when selling an investment property in the UK?
How do you avoid capital gains tax when selling an investment property in the UK?
One of the easiest ways in which to avoid or reduce Capital Gains Tax (CGT) when selling investment property is to make use of the Capital Gains Tax-Free allowance. Secondly, you should try to spread the sale of your investment portfolio over different tax years in order to minimise how much CGT is paid at 28%.
What is Capital Gains Tax CGT?
Capital Gains Tax or CGT is a UK tax you pay on a portion of the capital gain you earn from the sale of various chargeable assets.
“Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.”UK Government HMRC
Chargeable assets includes investment property or land. But it excludes your main residence or what’s referred to as your Principle Private Residence (PPR).
The amount of CGT you pay will depend on your other income. The amount of Capital Gains Tax you pay is either 18% or 28%. The rate you pay will depend on whether or not you’re a higher rate tax payer.
However, be careful if you are ‘trading‘ properties as a developer who builds houses to sell. This is then deemed as a trade. In this case you’ll be taxed in a difference way on these property sales. As an individual you’ll be taxed on the trade as Income Tax. But as a limited company your profits will be charge to Corporation Tax.
But this article is about investment property only, which would include buy to let properties and house of multiple occupation (HMOs). With an investment property you are not ‘trading’ the asset. But instead you will have bought it for its investment potential and return on rentals over time.
What you end up paying the CGT on is the difference between what you sell the investment property for and what you paid for it in the first place.
So how do you reduce capital gains tax on the sale of investment property?
How to reduce capital gains tax on sale of investment property
There are few ways in which you can reduce or mitigate your CGT liability. But it’s important to emphasise I am talking about minimising tax and not evading tax.
For the purpose of this article, I am talking about Capital Gains Tax on individuals. If you own your investment property in a limited company and want to sell it, this is a completely different article altogether.
1. Use your annual tax-free allowance
As already explained, Capital Gains Tax is charged on the profits made when certain assets are sold, or transferred. Which in this case is your property investment portfolio or it may be an individual investment property.
The amount of CGT you pay is on the gains you make that are above your annual tax-free allowance. The Capital Gains Tax free allowance for 2019/20 tax year is £12,000. Be aware that any gain you have in excess of the Annual tax-free allowance will be taxed.
You should make sure you use your annual exemption allowance, as this cannot be carried forward (or back) into other tax years. If you don’t use it, it will be lost.
2. Spread your gains over a number of tax years
Instead of selling a number of investment properties in one tax year, you would be better off spreading your sales over a number of tax years. But this will depend on how many investment properties you have. This is better explained by way of an example.
Example of spreading Capital Gains over two tax years instead of one
Let’s say you have two investment properties. One with a capital gain of £13,500 and the other with a gain of £22,500.
Option #1 - sell both investment properties in the tax year to 5 April 2019
|2018/19 Tax Year|
|Total gain in 2019 tax year (13,500 + 22,500)||£36,000|
|Less 2019 Tax-Free allowance||£11,700|
Option #2 - sell investment properties in two different tax years
|2089/19 Tax Year||2019/20 Tax Year|
|Total gain in 2019 tax year (13,500 + 22,500)||£13,500||£22,500|
|Less 2019 Tax-Free allowance*||£11,700||£12,000|
With option #1 the total capital gain is £24,300. If we assume you’re a higher rate tax payer, the CGT rate is 28%. This means the CGT would be £6,804.
However, looking at option #2, the total capital gain is now reduced to £12,300. Using the same 28% tax rate, the tax liability has been reduced to £3,444. This is a saving of £3,360. Not a huge amount, but remember this is on just two properties. But also this saving is part way to a nice holiday!
3. Offset capital losses against capital gains
When calculating your capital gain for any tax year, you can off-set any capital losses brought forward from previous tax years. You deduct capital losses from capital gains in order to arrive at your net gain for tax purposes. This is before deducting the tax-free annual allowance.
This is a where a bit of tax planning is worthwhile. For example, if you have properties which have a capital loss, you are better to sell these first. They can then be set against future capital gains. If you do this the other way around, the loss will carry forward until such time as you make another capital gain.
Also, if you crystallise capital losses in the same tax year as your capital gains, you can reduce your overall tax bill in that tax year.
4. Gift assets to your spouse
Transfers of assets between spouses is currently exempt from Capital Gains Tax. So by gifting investment properties to your spouse (or Civil Partner) before they are sold, you’ll be able to take advantage of two CGT tax-free allowances. This would amount to £24,000 in the 2019/20 tax year.
Alternately, you could do a transfer so that each property becomes jointly owned. This way the capital gain will be split and you’ll each receive the £12,000 tax-free allowance.
5. Reduce your overall taxable income
The rate of Capital Gains Tax you pay is based on the rate of Income Tax you pay in any tax year.
Therefore by lowering your taxable income in any one tax year could reduce the CGT rate from 28% to 18% if you are selling residential investment property.
Reducing taxable income isn’t always easy. But if you own your own company, you can delay when you get paid either by salary or dividends.
Final comments and a warning about reducing your capital gains tax
It’s always best to seek professional tax advice ‘Before’ you sell your investment property, not after. Please note that tax rules and legislation changes too.
Finally, I’d also like to add that ‘tax avoidance’ is legal, whereas ‘tax evasion’ is illegal. Please don’t be tempted to sell investment properties without declaring the capital gains to HMRC. Defrauding the taxman could land you with a hefty fine, interest payments and even a prison sentence.
I hope this article has helped on how to reduce capital gains tax on sale of investment property
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