If you are a professional landlord, property investor, sole trader or business partner, your liability to capital gains tax can be significant.
It is therefore vital to consider any capital gains tax allowance on property, maximising all available relief so as to minimise any potential tax bill when you come to sell or dispose of your residential portfolio or business assets.
Capital gains tax explained
Capital gains tax is the tax payable on any gain made, after deducting allowable losses and any available allowances and reliefs, when you dispose of or sell a chargeable asset.
A ‘chargeable asset’ includes property that is not your main residence, for example, a buy-to-let or investment property. It also includes business assets such as land and buildings, plant or machinery, and even shares.
Understanding capital gains tax allowance on property
Capital gains tax only becomes payable on any net gains that exceed your tax-free allowance. All chargeable gains will be added together when assessing your overall capital gains tax allowance on property.
The current capital gains allowance for executors or personal representatives of a deceased’s estate is set at £12,300 for the year 2020-21, and similarly for trustees of disabled people. The allowance for other trustees is £6,150.
The net effect of this capital gains tax allowance on property, or other chargeable gains, is that you will not be liable to pay tax on any profit if all your gains in one year fall below this threshold.
Calculating capital gains tax allowance on property
A tax liability will only arise if your net gains, when added to your total taxable income, do not exceed the capital gains tax allowance on property and other chargeable assets.
The tax rate at which any capital gains liability will be payable will depend on whether you are a basic or higher rate tax payer based on your annual income.
For 2020-21 capital gains tax on residential property is payable at either the basic rate of 18% or the higher rate of 28%. The rate of capital gains is much higher for residential property than for other chargeable assets for which the respective rates are just 10% and 20%.
However, you can also use your tax-free allowance against the gains that would be charged at the highest rates, for example, where you would be liable to pay 28% on residential property.
Maximising capital gains tax allowance on property
If you are looking to maximise any available capital gains tax allowance on property, forward planning is essential.
The timing of a sale or disposal of a property can have a significant impact on the availability of any tax allowance or relief, not least when considering what other gains have been made in any given tax year.
By thinking ahead you can plan what property you can dispose of, and when, to make the most of your capital gains tax allowance and any other available relief. For example, you might look at disposing of an asset where you stand to make a significant gain where you have a full tax-free allowance for that year.
Alternatively, in circumstances where other gains made would expose you to tax in the higher bracket, you may want to defer any sale or transfer until the following tax year.
This type of tax planning is especially important in the context of capital gains tax allowance on property, given that only capital losses rather than allowances can be carried forward to another tax year.
Common forms of capital gains tax allowance on property
In addition to the capital gains tax allowance on property, there are various other types of relief available. Some of the main forms of relief are considered below:
Private residence relief
An individual’s primary residence is exempt from capital gains tax under the ‘private residence relief’.
Whilst at first blush this may not seem to offer any financial benefit to the professional landlord or property investor, private residence relief may still provide some tax advantages where the vendor has lived in the property at some stage, so long as this was not designed solely to benefit from this relief.
In particular, you may be eligible for partial relief for the period of time that you lived in the property. You will also be entitled to relief for the final 18 months of your period of ownership, as long as the dwelling house has been your only or main residence at some point.
Where the property in question has been your only or main residence, and private residence relief is available in respect of part of the gain, additional relief may be available in the form of ‘lettings relief’ if the property has also been let out during your period of ownership.
To be eligible for lettings relief, you must have lived in your home at the same time as your tenants.
Accordingly, this allows you to claim the lower of either the amount of Private Residence Relief already calculated, £40,000 or the amount of any chargeable gain you make because of the letting.
Business asset rollover relief
If you are a sole trader or partnership, you may be able to delay paying capital gains tax if you sell or dispose of any business assets, including land and buildings, and use all or part of the proceeds to buy new assets.
The net effect is that any liability to capital gains on the original asset will be rolled over so that it only becomes payable at the point when the newly-acquired asset is sold at gain.
To qualify for business asset rollover relief, you must buy the new asset within 3 years of selling or disposing of the old asset, your business must be still trading and both the old and the new assets must be for use in your business.
This type of relief can prove attractive where your capital gains tax allowance on property has been exceeded and so deferring any tax liability is financially preferable.
Gift Holdover Relief
You may also be able to claim gift holdover relief if you give away business assets, or sell them for less than they are worth to help the buyer.
This effectively means that you do not pay any capital gains tax when you give away the assets, and the person to whom you give the assets only pays tax when they come to sell or dispose of them.
Any capital gains tax liability is simply deferred, where any chargeable gain arising during the period of previous ownership becomes payable by the new owner at the point of future disposal.
Capital gains tax allowance on property – key takeaway
As a landlord, property investor, sole trader or business partner, forward planning is key to the successful disposal of your assets, maximising gains and minimising any tax liability by making the most of your capital gains tax allowance on property.
In this way you can legitimately benefit from the tax-free threshold and other forms of tax relief.
However, it is always prudent to seek professional financial advice in relation to the disposal of any chargeable asset and the wider tax implications.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.