Weighing up CGT
On selling your only or main home there is usually no capital gains tax (CGT) to pay, regardless of the size of the gain. But the same is not true when an investment property, such as a buy-to-let or a holiday home, is sold or otherwise disposed of, realising a gain.
Luckily there are steps that can be taken to minimise the amount of CGT that is payable:
1 A key step is to live in the property as a main residence ‘for a time’. Not only does this allow for the main residence exemption but also ‘shelters’ the final period of ownership and brings ‘lettings relief’ into play which can be crucial in wiping out most, or all, of the CGT bill.
For a property to qualify as a main residence, it is all about the quality, not quantity, of occupation. HMRC may look for evidence that the property was actually lived in as a main home. Evidence such as where the post is sent and the proximity to your doctor all help demonstrate to HMRC that you were serious about making this property your home. The time isn’t as crucial and there is no ‘minimum six months’ of occupation, a common misconception.
The period actually occupied is counted as an exempt period plus the last 18 months of ownership (although the government is thinking of changing this to nine
months) Also, to get the last 18 months exempt, the period of actual occupation does not have to precede the letting – it can be at any time.
2 By letting it out but living in it at some point, ‘lettings relief’ is available and is calculated as the lesser of:
The amount of the Principal Private Residence Relief (PPR); £40,000; or
The amount of the chargeable gain arising from the letting. It’s no wonder, given that this can often eliminate any CGT, that the government has decided to scrap it from April 2020.
3 Another strategy is to put the property in joint names before sale. Every individual enjoys an Annual Exempt Amount (AEA) for CGT purposes of £11,700 so when a property is jointly owned there are two AEAs available to shelter the gain, saving tax of up to £3,276 for 18/19 (£11,700 28%)
Transfers of assets between spouses and civil partners do not trigger a CGT liability as they give rise to neither a gain nor a loss. Take care, however, if there is a mortgage on the property as, depending on the value, this may trigger a stamp duty land tax bill as there is a transfer of valuable consideration.
Always look at the respective tax positions of both parties before doing anything, as in some cases a full transfer may be better if CGT position and marginal rates vary between the parties. The ‘window’ to take advantage of some of these reliefs is closing rapidly, so it may be time to consider crystallising a gain before HMRC get their muddy paws on some of it.
This column is sponsored by Norwich Accountancy Services
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