Capital Gains Tax for Landlords – FAQs
Critchleys is an accounting, financial planning and human resource consultancy firm in Oxfordshire. Here, Liz Higgins answers some frequently asked questions about Capital Gains Tax:
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the chargeable gains made on the sale of certain assets which includes shares and a sale of an investment property. The gain is calculated by taking the sale proceeds of the property (after sale costs) and deducting the cost of the property (after purchase costs). This overall gain less an annual exemption, which is currently £10,900 for individuals and £5,450 for trustees, is charged to CGT.
There are two rates of CGT, 18% and 28%. For individuals, any gain over the annual exemption is taxed at 18% where it falls in an individual’s unused basic rate income tax band (currently £32,010) and 28% thereafter.
Which purchase and sale costs can I claim?
You may make a claim to include the following items:
- Estate agent’s fees
- Solicitor’s fees
- Advertising fees
- Stamp Duty Land Tax
- Survey costs
- Fees in relation to CGT valuations
What about improvements to the property?
HM Revenue and Customs (HMRC) class an improvement if work is carried out to an existing or newly acquired property which results in the asset being altered, improved or upgraded.
So if you have improved your property by adding on an extension or carried out structural improvements then this may be claimed. You will need to watch that you haven’t already claimed any of these expenses against your rental income. For instance, the cost of a replacement kitchen/bathroom may have already been correctly claimed as a deduction against rental income.
Will I have to pay CGT if the property was my home before I let it?
This will very much depend on the circumstances. Generally, if you sell your own only home then you won’t have to pay CGT as it is your “Principal Private Residence (PPR)”. If it hasn’t been your PPR for the total time that you have owned the property and you have let it out, then you may get a further relief called “Letting Relief” which can reduce the gain by up to £40,000.
Will I have to pay CGT if the property was let out whilst I worked away?
If you live in a property both before and after an absence, then certain periods of absence will be ignored. These periods are as follows:
- Any reason = currently up to three years (see below)
- Employment in the UK = up to four years
- Employment abroad = unlimited period
- Employment of spouse elsewhere = up to four years
How will the reduction in the CGT Private Residence Relief affect the tax liability?
The recent Autumn Statement announced a change to this relief. For a sale of a property which has at some time been your “Principal Private Residence”, but you no longer live there, then you are treated as living in the property for the last 36 months of ownership, even if you live somewhere else. This has been the case for many years, but from 6 April 2014 this final period exemption will be reduced to a maximum of 18 months.
If I am not UK resident, do I have to pay CGT in the UK?
This will really depend on your circumstances. Currently if you have been UK resident for at least four of the last seven tax years and then become non-resident for less than five years, you may have to pay UK CGT while you are abroad if you owned that property before you left. In addition, there may be a form of CGT in the country where you are now resident.
However, the Autumn Statement announced that there will be a consultation on the proposal to introduce a CGT charge on future gains made by non-residents disposing of a UK residential property from April 2015. This is a complex area and professional advice should be sought.
What planning can I do to reduce the CGT?
If you have a spouse or civil partner, you may wish to consider transferring the property into joint names prior to the sale. This may mean that you may obtain the benefit of two annual exemptions of £10,900 and subject to your own and spouses/civil partner’s circumstances, the benefit of some unused basic rate income tax band, so lower tax is paid.
However, it’s not that simple, and if a property did qualify as your private residence, but doesn’t any more, then putting it into joint names sometimes means more tax. So it’s probably best to get advice if this applies to you.
Bearing in mind the reduction in the Private Residence Relief to 18 months, you may wish to review if it’s beneficial to sell the property before 5 April 2014.
If you are currently non-resident and thinking about selling your property you may consider selling it prior to 5 April 2015 if the gain is exempt.
CGT can be deferred by investing in an Enterprise Investment Scheme (EIS) which is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. Income Tax relief at 30% can also be obtained on the amount invested.