Landlords: Is avoiding Capital Gains Tax really all that complex? ... We think not.
Being well cultured in the art of avoiding Capital Gains Tax (CGT) should be a necessity for any seller, be they selling a second home or even a piece of land! In fact, it's such a hefty profit tax that we'd go as far as to say that if you're not up to speed on CGT, you've messed up (sorry guys). You see, when it boils down to it, house sales are like a financial marriage - you get out what you put in. So by neglecting to do your research, you're almost ensuring that you end up paying the price... literally.
(The sound of your profits being eaten away - Munch! Munch! Munch!)
Although that being said, avoiding capitals gains tax on property isn't impossible, even with the £57.7 billion dent that the furlough scheme has had on the economy. Saying that though, it is likely to become significantly harder, especially if the Tories want to keep their promise of a 5-year triple tax lock; government cuts are more or less inevitable. Exactly why getting clued up on avoiding Capital Gains Tax now (before tighter restrictions are introduced), would be a very wise move. So, to help you master the basics and get your head around how to avoid Capital Gains Tax in 2021, we present to you our full-fat guide on everything CGT. Our guide to mastering the basics.
Here for info on something niche like Capital Gains Tax on mixed residential and commercial property. Or just to learn a few of the strategies for avoiding Capital Gains Tax? Use the menu below to find your answers in record time...
- What is Capital Gains Tax (CGT)?
- How much is capital gains tax?
- At what point do you pay Capital Gains?
- How to Report and pay Capital Gains Tax on property
- How can I avoid Capital Gains Tax on property?
- Is CGT changing in 2021?
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Capital Gains Tax, CGT for short, is a percentage fee payable to the government on any profits made through the sale of property, stocks and other high value assets. You're liable to pay CGT as soon as you sell any of these assets, providing of course it has increased in value. If not, you'd be exempt, and in some cases be able to use that loss to lower the amount of tax you'll pay elsewhere (more on that later).
However, that's not to say ALL of your profits will be taxed; Capital Gains Tax only applies to part of your profits. You see, each year, everyone (including children) get what's known as an Annual Exempt Amount. Basically a CGT allowance under which any profits will NOT be taxed. At present, this is £12,300. But there's more.
The amount of CGT you pay will also depend on the amount of time that you've held the asset - in this case, your property. The longer you've held it, the smaller the percentage of CGT will be. These are what's known as short term and long term Capital Gains Tax. A technicality that's useful to know about when you're planning how to avoid CGT.
FYI: Luckily, for the majority of homeowners, CGT does NOT apply to the sale of their home. You're only liable to pay CGT on any property that isn't your primary place of residence - i.e. your main home where you have lived for at least 2 years. So it's those with second homes and Buy To Let portfolios who really need to keep their ears open.
Capital Gains Tax doesn't come with a solid cost as such. Reason being that the amount you owe will depend on a LOT of factors to do with your own situation as well as the asset. Here's a few to bear in mind...
- The core value of the asset you're selling - in the case of property, this would be your sale price.
- The type of asset - residential property is susceptible to more CGT than other investments
- How long you've owned the asset - Those assets which have been owned for a longer period of time, typically work out to be taxed at a lower percentage.
- Your personal tax situation - For higher rate taxpayers, the amount of Capital Gains Tax that's payable is usually larger
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How to work out capital gains tax?
When it comes to working out your capital Gains Tax, your first port of call should be to consider what type of taxpayer you are. Out of all the things to look out for (above), this is usually what will have the most significant impact on what you'll pay, aside from the value of the asset of course.
To do so you first need to work out your taxable gains. This is the amount of money you've made from the asset after deducting any allowable losses (more on these later). So for argument's sake, let's say our taxable gain is £15k, but we have £2k of allowable losses, our total taxable gain would be £13k. Next, we then take our £13k and deduct the CGT tax-free allowance, which at the time of writing this blog is £12,300. This leaves us with £700, which would be subject to CGT.
So now we've got our taxable amount (£700), we then need to work out what percentage of Capital Gains Tax we're liable to pay. All of which depends on whether you're a basic or higher/additional rate taxpayer. At the time of writing this blog, basic rate taxpayers are those with earnings of less than £37,700. Higher or additional rate taxpayers are those with earning which exceed this value.
So all you have to do to work out which one you are, is combine your £700 value with your annual income. In the case of this example, our annual income is £35k, leaving us with £35.7k. Therefore, we would be classed as a basic rate taxpayer and our £700 would be subject to 18% tax (£126). Reason being that in this instance we've sold a property. To understand why in this instance we've been charged 18%, see the Capital Gains Tax bands below...
- Basic rate taxpayers - Fall into this bracket and you'll pay 10% on any gains, or 18% if the gain was through residential property.
- Higher/ additional rate taxpayers - If this is you then you'll pay 20% on your gains, or 28% if it's on residential property.
FYI: If you're 'disposing' of a property which is abroad and are a resident of the UK, you will still be subject to the usual charges, that is of course unless you brush up on avoiding Capital Gains Tax.
Can't be bothered doing all the sums? Let this Capital Gains Tax Calculator do the work for you!
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What about Capital Gains Tax on mixed use property?
If your property is what's known as 'mixed use' (i.e. a mix of residential and commercial), then the way you pay Capital Gains Tax can differ. The general rules is that you're liable for CGT on any part of the property which is generating you an income.
The easiest way to think of this is as a percentage. So for instance, if you rent out 100% of a building, you will be liable to pay CGT on those profits. Whereas if you live in part of the building, then you're only liable to pay CGT on that part which you let out. Own a block of four flats and live in one yourself, and you'll be liable to pay CGT on any profit made by the other 75% of the building. But that's not to say you can't turn your money into a money-maker too. You don't have to pay CGT if you take in a lodger.
So, now that you're clued up on what Capital Gains Tax is and how it's calculated, you're probably wondering how you go about paying it. Is it deducted from the proceedings of you sale upon completion? Or, are you liable to pay it yourself? No need to worry - read on. We've unravelled all of this for you...
You pay Capital Gains Tax within 30-days of making the gain. So in the case of selling a property, this would be 30-days from your completion date. But, before you can go ahead and make payment, there are a few details that you'll need to get your hands on first. These are...
- The address of your property including the postcode.
- The date on which you acquired the property.
- The date at which contracts were exchanged.
- Your completion date - in other words, the day you formally stopped being the property's owner.
- Confirmation of the price that you bought the asset for, as well as its final sale value (i.e. your Sold Price).
But don't forget...
- Evidence of any costs that came with imporving the property, be it a new roof or re-landscaping the garden.
- Details of any tax relief or costs that you incurred when disposing of the asset. In the case of your property this could be agent's fees.
Why do we urge you NOT to forget these? Read on...
Avoiding Capital Gains Tax can be tricky - but we'll help you do it!
It's on thing getting all your documents in order, but something else actually paying CGT. You see, the way you pay Capital Gains Tax in 2021 is online via the government website. A quick and easy way to do so... if you know how. So to help make declaring your gain and paying CGT as simple as possible, we've put together a quick walkthrough of the process looks in 2021...
- Create a 'Capital Gains Tax on UK property' account here. Without one you'll be unable to declare or pay any form of CGT.
- Submit a CGT calculation of what you think you owe in Capital Gains Tax (HMRC may make amends).
- If HMRC does make amends to your calculation, check why they've been made and if there's any that you don't understand reach out to them direct.
- Pay your Capital Gains Tax bill.
PS/ You can use this account to make other tax declarations in the future, so write down your username and password.
Is there a penalty for not paying Capital Gains Tax?
Yes (think you knew that was coming).
Those who fail to pay CGT within the 30-day window can receive a penalty, as well as interest on top of that. As you'd imagine, the fine increases depending on how long you've defaulted. The structure of fines is as follows...
- Default for up to 6 months = £100.
- Miss a payment for longer than 6 months = an additional penalty of £300 or 5% of the due amount - whichever is greater.
- Fail to pay CGT for over a year = an additional penalty of £300 or 5% of the due amount - whichever is greater.
FYI: If you've completely forgotten to pay your Capital Gains Tax and are worried about how it will affect your credit score, don't be. HMRC or any local council will NOT share any info about your payment history with any credit reference agencies.
Slow sales are practically a penalty in themselves... not that we 'do slow'...
So you've calculated your CGT payment and you're horrified by the result. The figure you're greeted with isn't exactly small. But not to matter, as this is the part of the blog where (hopefully) you'll have a lightbulb moment. Either that or be completely gobsmacked.
Without further ado then, here's how to minimise (and even completely avoid) Capital Gains Tax on property in 2021. Yes, believe it or not, such a thing really is possible! Don't believe us? Read on to discover the ins and outs...
Ways to reduce Capital Gains Tax in 2021
Downsize your portfolio strategically
Every UK resident gets a tax-free allowance of £12,300 (as of present) before Capital Gains Tax is charged, so making best use of it relies on not just property sales, but strategic property sales. Basically, sales which are timed to ensure each year this allowance is fully used up. Landlords using this strategy would look to downsize gradually, opposed to simply flogging half their portfolio overnight. Sell 10 houses over 10 years and you'll take benefit of 10 times as much tax relief (shock face).
Use your spouse for avoiding Capital Gains Tax
There's more perks to a partner than just kids and their company - you can also use them to reduce your tax liability too! As a large part of CGT is based on your annual income, if you (the landlord) are a high rate taxpayer, but your partner doesn't work, then you may be in luck. Sell the property in their name and you'll be charged the lower rate of CGT as they will be classed as a base rate taxpayer. Cheeky trick that!
Offset your expenses against your CGT -
Just because you're selling a property and not some cheap plastic toy that's 'Made In China', it doesn't mean that you're not operating under business practices. You're buying assets, holding them for a period of time and then selling them on - seems pretty business-like to us. And what do all businesses do to lower their tax liability? They file every expense they possibly can and offset it against their tax bill. Same applies when you're selling a second property.
If you've paid £3k for a pricy estate agent, keep record of it. Splashed out £5k on a new roof, take note of that too. In fact, most costs you incur as a means of adding value to your property or selling it, you'll most likely be able to offset against your CGT bill. Why? Because only pay tax on profit, not investments. If spending £5k on a roof, adds £7k to the house price, then you'll only pay tax on the £2k it's added. Have enough expenses like this and you find yourself avoiding Capital Gains Tax altogether.
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Ways to avoid Capital Gains Tax in 2021
Avoid CGT by refinancing a house instead
Avoiding Capital Gains Tax altogether could be as simple as a speedy re-finance. Reason being that when you re-finance a property, you refinance it based on its current value. Let's explain.
So say you originally bought your house for £80k, but now it's worth £160k, your re-finance options will be based on that figure of £160k. Therefore, if your new house repayments is a 25% LTV, you'll be able to pull out 120k. All without paying a single penny in Capital Gains Tax. Why is simple. You're taxed on forms of profit, not debt (i.e. a house repayments). In this instance then, you'd be left with £120k for a house that cost you £80k + a house that you can continue to rent out each month.
Change your Primary Place of Residence
Avoiding Capital Gains Tax could be as simple as moving house for two years. You see, the one property sale where you don't pay CGT is the sale of your primary residence; you only pay capital gains for any property that would be classed as an investment. So, if you're thinking of selling a second home that's worth significantly more than your current home, then calling it your Primary Place of Residence could save you significantly more cash. Do so and like magic, you'll avoid CGT completely.
Gift your property to your child through a trust (The NO1 way to avoid CGT)
Providing you've got a child and a property worth under £650k that's fully paid off, this is 'the' NO1 way for you to avoid Capital Gains Tax in 2021 - period. Not only can it help you avoid CGT, but it can also help you escape Stamp Duty and Inheritance Tax too! However, it's not the easiest to wrap your head around, so while we have included an example below, we would suggest contacting a trusted accountant before getting serious.
The example is as follows...
You have a property; originally you bought it for £100k, only now it's worth £200k. So instead of selling it, you decide to gift it your child through a trust fund. A great way of avoiding Capital Gains Tax, maintaining a rental income and at the same time, giving your child an insight into business. A win-win! Plus, straight away by gifting the property, opposed to selling it, you've avoided SDLT - NO STAMP DUTY will be charged (one down - two to go)!
Next, you've got a choice. Pay CGT or not - we urge you to take the 'not' route. To do so you have to agree to something called a TCGA Section 260. In layman's terms, this is part of tax legislation, which allows you to use your lifetime Inheritance Tax-free allowance instead of paying Capital Gains Tax (CGT down- one to go).
And that one is Inheritance Tax, which let's be fair isn't cheap. Charged at 40%, Inheritance Tax for the example above would amount to £80k! But by opting for the Section 260, you won't have to pay a penny. Each person in the UK has a lifetime Inheritance Tax-free allowance of £325k. So as a couple you could use this strategy to funnel up to £650k's worth of property into a trust. You can keep it there for 9 years free of fees!
FYI: If you're worried about avoiding Capital Gains Tax this way because your child hasn't properly settled down yet, there's no need to be. Because it's in a trust and not in their ownership, in the case they get a divorce you will not lose the property. Reassuring to know!
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While there's no guarantee that Capital Gains Tax will be changing in 2021, there's certainly talk of it. What with the large financial dent that the COVID pandemic has brought upon the economy, some form of cuts are almost inevitable. It's rumoured that changes to CGT will be part of a government tax re-shuffle later in the year - it's estimated the proposed changes will come into effect from the Autumn.
The changes themselves include:
- Bringing Capital Gains Tax rates more in-line with the rates of income tax, which vary from 20% to 45%, depending on what type of taxpayer you are.
- There's also talk of bringing down the CGT tax-free allowance from £12,300 to somewhere in the region of £2,000 - £4,000.
All of which means that if you're a higher rate taxpayer (in particular, a Buy To Let landlord), you can expect to see your expenses rise quite sharply in the future. Not that you don't have time to make a quick 'pump and dump' before these changes come into effect. Only, if you have plans to sell off a second home or a large chunk of a portfolio, you need to act fast and find a way of securing a quick property sale. Not easy when agents will try their best to persuade you into crossing your fingers and hoping for the best.
HINT: An open market sale isn't likely to cut the mustard. You need something faster, especially now that the Stamp Duty Holiday has begun to be phased out.
Thankfully though, fast house sales aren't actually that hard to come by, providing of course you know where to look. Take us for example. As a cash buyer of property across England and Wales, we can buy your second house in just 7-days! Yep, you read that right - 7-days!
Our team has in excess of 50 years' experience in fast house sales and is well equipped with the industry know-how you need to get your property sold in record time. We're also not picky either. So if you're wanting to sell a house that's in need of repair or tenanted, we'll but that too. Call us open minded.
We'll even cover the cost of your surveys and legals too, as a special 'thankyou'! So what do you have to lose? Avoiding Capital Gains Tax has never been so easy...
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