Taxing times ahead!
Planning to minimise the pain

Owners of second properties could face sizable tax demands if they sell to try and cash in on increasing property prices. The good news is that with the appropriate planning a potentially high capital gains (CGT) tax bill could be reduced considerably.

In the UK, no one pays tax on the sale of a main home, because it is exempt from CGT. If the value has increased since you bought, the profit is tax-free.

Over the past few years, the number of people buying multiple homes has increased, as more families purchase holiday homes or student accommodation for their offspring to live in while at university. Others have turned to the buy-to-let market to help plan for their retirement. If you own more than one property either in the UK or abroad and the price goes up, you are taxed on any profit when you sell, currently up to 40 per cent.

The Council of Mortgage Lenders estimates that more than 1m homes in the UK are now second homes or part of buy-to-let portfolios with a further 400,000 homes owned abroad.

Specialist tax advisers are concerned that many owners are not getting the right advice about simple steps that could help mitigate this loss. It may be possible to reduce a tax bill of a few hundred thousand pounds to virtually zero. But it is complicated, and most people don't know where to begin say PwC, the giant accountancy firm.

Take a look at this 10-point plan amateur landlords should consider if appropriate to their situation.

1. Claim all allowable expenses
Your taxable capital gain is the difference between what you buy and sell the property for. But you can add all professional estate agents and solicitor's fees to the purchase price plus stamp duty and the cost of any money spent on improvements. Make sure you keep receipts for all these items.

2. Principal private residence
Consider switching "principal private residence" exemptions between properties. All gains on property are taxable with the exception of the home you live in which the taxman calls your principal private residence. However, if you own more than one home you can elect which you wish classed as your primary residence, provided there is some evidence that you have actually resided there, albeit shortly. If you live for even a matter of weeks at any stage in your "second" home, this could enable you to write off the last three years of capital gains when you come to sell. But the window for exploiting this loophole is tiny. You must elect which will be your primary residence within two years of the purchase of one of the various properties you own. Having made your choice, you can then change it. But if you fail to elect, the opportunity is lost.

3. Longevity gives longer relief
Owners can also claim "taper" relief. If you have owned a property for three years, you cut the taxable gain by 5 per cent, and a further 5 per cent for each subsequent year, up to a maximum 40 per cent after 10 years.

4. Gain from indexation
If the property was bought before 1982, then the revenue assumes you paid its value at April 1982, which wipes out any gains to that point. Between 1982 and 1998, a further indexation allowance is granted. As the retail prices doubled between these years, the revenue will write off that amount again for tax purposes.

5. Live in the property
Any extended period you live in the property reduces the CGT bill accordingly. For example, if you own a property for 17 years and lived in it for 12 years you will be liable for 12/17th of the tax bill, plus a further three years exemption, wiping out 15 years worth of gain.

6. Move in before letting it out
It makes sense to at some stage live in a property you buy-to-let out. Not only can you gain three years exemption, but you get a further £40,000 allowance to offset against any gain. A husband and wife both receive this allowance, allowing them to write off a further £80,000 of the gain provided they are joint owners. As with the election of a principal private residence, the length of time required to live there is not written in statute. Although there is a general consensus that three to four months or preferably six months is required.

7. Utilise personal allowances
Once you have reduced the gain as far as you can, each spouse can claim a CGT allowance currently £9,200, allowing a married couple to realise £18,400 property profits tax-free. Tax is charged at your marginal rate, so make the most of any breaks available. Non-taxpayers, for example, pay no tax up to £5,225. They then pay 10 per cent tax on the first £2,230. Thereafter, they pay savings tax of 20 per cent (rather than basic rate of 22 per cent) up to £34,600, following which 40 per cent deductions.

8. Offset other losses
If after these measures you are still facing a potential tax bill, take a look at your other assets, not least your share portfolio, to see if you are sitting on any losses. If you sell these shares in the same tax year and crystallise the loss, this could be offset against the property gain.

9. Offset local overseas taxes
If you are one of the 400,000 Brits who own a property abroad but are resident for UK tax purposes, you are liable for CGT in exactly the same way as if the property was here, but you can claim the same exemptions. However, you may also find yourself liable for local property taxes. Where these have to be paid, they may be permitted to be deducted from the UK bill.

10. Getting hitched
Tax bills can arise where a couple each has a property when they meet but decide to rent one out when they move in together. Until they marry, they can enjoy two lots of "principal primary residence" exemptions, which probably solves their problem. But once they tie the knot they only have one between them. Once married, they must rely on the other exemptions listed above. However it’s worth remembering that unmarried couples cannot transfer assets between each other free from CGT and capital gains tax as married couples can.

If you would like to find out more, please email or contact us for further information.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Your home may be repossessed if you do not keep up repayments on your mortgage.

Article date: 09.07