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Selling a Buy to Let Capital Gains Tax
Selling an investment property triggers liability based on the increase in value of the asset during ownership, minus certain costs. Where you have lived in a property as your main home , for any point of your ownership, the period is discounted when calculating the gain – in a process called “appointment”.
How CGT is applied
The rate of tax you pay on capital gain is calculated by adding the taxable gain to your taxable income.
If you remain within the basic rate tax band, you will pay 18% tax on the gain. If you fall into the higher rate tax band, you will pay 28%on at least some of it.
For 2015-16, the personal income tax allowance is £10,600 and the basic rate band is £31,787. Anyone with income over £42,385 pays higher rate tax on the excess. Everyone is entitled to tax free capital gains, worth £11,100 this tax year. Only gains above this are taxed.
If you earn £20,000, for example, and make a taxable gain of £10,000 (after your £11,100 annual allowance), the £30,000 total will fall within the basic rate band and you will pay 18% CGT.
If on the other hand you earn £35,000 and make a taxable gain of £25,000 you will be in the higher rate band. The £7,385 of the gain which is still within the basic rate band will be taxed at 18%, while the amount over £42,385 will be taxed at 28%.
Aside from well-known steps to reduce your CGT bill, such as transferring a share of the property to a spouse to utilise their CGT allowance, private letting relief and principal private residence relief, there are some little-known tricks that can save you thousands.
Use your pension
By making a lump sum contribution to your pension, you could save up to £4,000 on your CGT bill.
All pension contributions worth £40,000 a year, or 100% of your salary if it is lower than £40,000, attract tax relief at your marginal rate.
A pension contribution can be used to reduce the tax you pay on capital gains by boosting your higher rate threshold. Someone who earns £45,000 and who makes a taxable gain of £25,000 would pay 28% CGT, giving a bill of £7,000. But by making a gross pension contribution of £28,000, they would receive tax relief on the contribution. This means that high rate tax is only payable on income over £70,385 (£42,385 + £28,000), so the £25,000 gain is taxed at 18%, rather than 28%.
The CGT bill would fall to £4,500 – a saving of £2,500. The most that can be saved through this trick is £4,000.
Use an Investment vehicle
There are a couple pf ways to offset, or delay, paying CGT, which could reduce your overall costs. These methods are more risky because they require investment in small and often start-up companies, so are only recommended for experienced investors with a diversified portfolio.
Investors with a CGT liability might consider investing in Enterprise Investment Schemes (EIS) as they could get an income tax credit but EIS can also be used to defer a CGT liability. EIS’s offer a 30% income tax credit to investors who buy shares in small, unlisted companies. The minimum holding period is three years.
Landlords with a CGT liability could postpone the gain they have mad by investing the equivalent amount in EIS shares. Through CGT deferral relief, the liability would only recrystallize when you sell your EIS shares. In theory, high rate tax payers could defer the liability until they retire and become basic rate tax payers, or continue rolling over the liability right up until death, when EIS shares would be exempt from inheritance tax and the CGT liability would dissolve.
For more help and advice please do not hesitate to contact us at Hoskin Mortgages.
Hoskin Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority number 613005. The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.