How to re­duce li­a­bil­i­ties when sell­ing in­vest­ment prop­erty

Yorkshire Post - Property - - PROPERTY - Ben Lowe

BUY­ING prop­er­ties for in­vest­ment has led to sig­nif­i­cant gains for many peo­ple in the past 60 years, de­spite the re­cent nasty blip in the mar­ket. But what about the tax paid on your profit when you sell and how can you avoid your prof­its be­ing re­duced sig­nif­i­cantly by tax?

This tax on prop­erty is cap­i­tal gains tax, which can eat up 28 per cent of your prof­its if you sell a prop­erty that you do not live in. The tax does not ap­ply to the prop­erty you live in as your main res­i­dence.

This is be­cause one’s main res­i­dence is ex­empt from cap­i­tal gains tax. It does usu­ally ap­ply, though, to prop­er­ties you buy for some­one else to live in, in­clud­ing in­vest­ment prop­er­ties i.e. buyto-lets.

How­ever, few are aware that the prin­ci­pal pri­vate res­i­dence re­lief that en­sures that the typ­i­cal fam­ily home is free of tax on sale lasts for three years from the date of sale.

So, imag­ine you live in a house for a year or two, pre­par­ing it for let­ting to ten­ants and then you move out and let it for three years. You can then sell it at the end of the three years free of cap­i­tal gains tax, even if it has dou­bled in value.

This will work if you tell your HM Rev­enue and Cus­toms of­fice that you elect for that prop­erty to be your main res­i­dence while you live there. When you move, you elect for your new home to be your main res­i­dence.

If you do not sell the house for four years af­ter mov­ing out, you still count the three years of ex­emp­tion you are al­lowed, plus the year you lived there, so that at least four-fifths of the tax is not payable, be­cause four of the five years do not count. If the cap­i­tal gains tax is £35,000 on sale (be­fore tak­ing into ac­count the ex­emp­tion), you would only pay tax of one fifth, which is £7,000.

Prop­er­ties for in­vest­ment and cap­i­tal gains tax re­port from the Govern­ment this month says that to qual­ify for this three-year ex­emp­tion, one has to show ev­i­dence of ac­tual res­i­dence, so that the shorter the time one spends in the prop­erty, the more dif­fi­cult it is to prove you gen­uinely lived there.

Usu­ally, res­i­dence of sev­eral months is enough, pro­vided your post comes there, your bank is given the ad­dress, your em­ployer (if any) was told, and you ac­tu­ally lived there. If the pe­riod of res­i­dence is only a few weeks, the Rev­enue would need a very good ex­pla­na­tion.

Ex­pen­di­ture on a prop­erty is also set against the cap­i­tal gains tax.

What is im­por­tant is that the work car­ried out has in­creased or main­tained the value of the prop­erty. It is not just any ex­pen­di­ture, there­fore. you can­not claim for get­ting the win­dows cleaned or fix­ing an old boiler. You can claim for an ex­ten­sion, or the cre­ation of an at­tic room, where be­fore there was none.

Keep a record of all ex­pen­di­ture, as it is nec­es­sary to sub­mit ev­i­dence to the Rev­enue when claim­ing to re­duce the cap­i­tal gains tax.

If you are de­vel­op­ing the prop­erty for let for the first time, then the cost of dec­o­ra­tive work is al­lowed against the tax. This can be in­ter­preted quite widely, so it is once again im­por­tant to keep all re­ceipts.

Ex­pen­di­ture of, for ex­am­ple, £20,000, comes off the sale price if it meets the cri­te­ria. The taxsav­ing would be 28 per cent of this, or £5,600.

When you sell an in­vst­ment prop­erty, there is also a per­sonal al­lowance of £10,100, but you can only use this once in a tax year. For this rea­son, it is of­ten ad­vis­able to only sell one buy-to­let prop­erty a year.

Also, a hus­band and wife, and also civil part­ners, can only claim their per­sonal al­lowances on the same prop­erty.

There is much else to be said about cap­i­tal gains tax and in­vest­ment prop­er­ties, but this gives you some point­ers, which can be use­ful in plan­ning what to buy, how to buy and when to sell.

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