In most instances, the sale of a house is part of the process of moving home
Which is an essential step to realising the equity locked in the bricks and mortar of a family house in order to upsize, downsize or relocate.
When the economy is strong, property will generally increase in value, but if the house that’s being sold is the permanent private residence of the seller, any profit made on the sale will not usually be subject to tax.
Sometimes however, the circumstances around a sale might not be quite so straight forward. If you’re selling a property that has never been – or is not at the time of the sale, your permanent private residence, it’s very likely that any profit you make on the sale will be subject to capital gains tax.
Your profit will be calculated on the difference between the price you sell the property for (minus any selling costs), less the original purchase price (minus costs for any major improvements you may have made).
If you sell a property which is subject to capital gains tax, it can have a significant impact on the profit you are left with when a deal is completed. We each have an annual capital gains tax exemption allowance – currently about £11k – but any profit remaining after this has been taken into account will be taxed at 18% for basic rate tax payers, 28% for those on the higher rate.
One of the first things we’ll want to know if we’re advising you about selling a property, is if the house in question has ever been your permanent private residence. This is important, because if it has, capital gains tax will be apportioned on the basis of how long this was for – compared with the total time you have owned it. So for example, if you have owned the property for 6 years and lived in it for 2 of them, one third of your profit will be offset, and you will have to pay capital gains tax on the other two thirds of the profit.
If you are a private landlord, a buy to let investor or you are letting out a property you inherited, capital gains tax is likely to be a concern when you come the dispose of your asset, and could significantly impact on your net profit – but by looking ahead and planning in advance, it may be possible to take action to mitigate the tax you are liable to pay.
Depending on your personal circumstances, there are a range of strategies that can be employed to reduce capital gains tax liability including:
Gifting part ownership of the property to your partner
If you are the sole owner of the property, you can select to ‘gift’ up to 50% of the ownership to your spouse or civil partner. This way, both you and your partner’s annual exemption allowances are combined, so you are able to earn around £22k in profit before you have to start paying tax.
Making the property your permanent private residence for a period
If you plan to sell a property that you’ve been letting out and have never lived in, you will not be entitle to tax relief as a landlord, but as mentioned earlier, tax relief can apply to the sale of a property you’ve been letting out – so long as you are able to demonstrate that it was you’re permanent, private residence at some point during your ownership. For this reason, it may be worthwhile considering moving into the property for a period, so that tax relief can be claimed on the basis that it is your permanent private residence – this relief will be in addition to any relief due to you because you have been letting the property out.
Making your rented property into a furnished holiday let
There are advantages when it comes to disposing of a furnished holiday let as opposed to any other type of rented property. Owners of this special category of property are considered to be running a business as opposed to being private landlords, and this brings tax advantages. Because the property is essentially a business, the seller can claim entrepreneurial relief which has the effect of lowering tax liability on any profit to 10% – a big saving when compared to 18% or 28% capital gains tax.
In order to qualify as a furnished holiday let, your property will need to meet a number of set criteria – these will include being advertised, available and actually let out for a certain number of days within a 12 month period. But crucially, a furnished holiday let can be located anywhere – not just in a seaside resort as you might assume, and taking into account that your capital gains tax exemption allowance will still be applicable, this is a strategy that might well be worth some sellers exploring further.
Are you a landlord or investor with a buy to let or furnished holiday let property?
Are you considering selling?
Perhaps you are a letting agency and have a client who’s contemplating the sale of a property?
If you’re concerned that capital gains tax is going to apply to the profits on a sale, the sooner you talk to us, the more likely we are to be able to help you to reduce your tax bill. Call us now to have an informal chat and find out how Inca can help you save money!