Assuming you own the property personally and its not your main residence (and benefiting from Principle Private Residence Relief), there are 2 rates of capital gains tax 18% for lower rate tax payers and 28% for higher rate tax payers.
You also have a CGT allowance which for 2018-19 is £11,700.
As a rough guide to assessing the tax
Work out how much you have earned – Salary, Pension, Dividends etc
Calculate your taxable gain + Sale Price – Sale Costs – Purchase Price – Purchase Costs – Improvements
You can then deduct the CGT allowance of £11,700 from the Gain (assuming you haven’t used against other gains)
If the total of 1 to 3 comes to more than £46,350 you pay 28% tax on the capital gain, if the total is less than £46,350 you will pay 18% on the gain until you hit £46,350 then pay 28% once you exceed it
You can now pay CGT straight away using the HMRC online service but most people do via self assessment and pay by 31st January following the end of the tax year.
There are special rules if you work overseas (and rules for working away in the UK)
This blog focuses on working overseas. The important thing to make sure you keep good records and tell your accountant!
Office/employment outside UK
TCGA92/S223 (3) (b)
You may allow relief for a period of absence of any length throughout which an individual worked in an employment or office all the duties of which were performed outside the United Kingdom, or a period of absence throughout which the individual lived with a spouse or civil partner who worked in such an employment or office if the conditions set out in CG65046 are fulfilled.
All of the duties of the employment must be performed outside the United Kingdom. You can ignore any return to the United Kingdom for holidays, but you should not ignore any duties which are in practice performed in the United Kingdom even if they are only incidental to the main duties performed outside the United Kingdom.
With all the recent changes in Property Investment Tax rules some investors have sought to move their property investments into LLP’s
Limited Liability Partnerships have largely been ignored by HMRC and untested with case law (so there is a risk that HMRC will start to pay more attention to them if they grow in popularity).
LLPs could have some benefits, especially for Inheritance, let’s look at the advantages:
If you had a property portfolio with potentially large capital gain you could move the property to the LLP as equity capital introduced (be careful on how the LLP agreement is written) and in theory this wouldn’t create a capital gain (CGT)
The LLP will show the full value in their accounts including the gain
Then you can add other family members
LLP’s are also being used as a stepping stone to incorporation.
S162 Incorporation Tax Relief would probably be available once the LLP has been trading for a while
A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.
This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.
But, commercial property investors, with more than 15 properties, will be exempt from the new charges.
Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!
Mortgage Interest offset against property income will be restricted
75% of the interest can be claimed in full and 25% will get relief at 20%
50% of the interest can be claimed in full and 50% will get relief at 20%
25% of the interest can be claimed in full and 75% will get relief at 20%
100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.
There will be an additional 8% surcharge to be paid on residential property.
Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).
Wear & Tear
Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.
The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
What could a Property Investor do to reduce the impact of these changes?
Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
Increasing the Rent – Could you charge more to cover the extra taxes?
Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc
The purpose of private residence relief is to relieve gains arising on the disposal of an individual’s residence so that the whole of the disposal proceeds are available to be used to buy a new residence of a similar standard. It is not intended to relieve speculative gains or gains arising from development.
The exclusion of speculative or development gains is achieved by TCGA92/S224 (3). It is important to understand the scope and limitations of this subsection so that you can apply it in suitable cases.
The subsection applies
where a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal, or
where there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.
Where the first part of the subsection applies no relief is due on any gain accruing from the disposal of the dwelling house. Where the second part of the subsection applies no relief is due on any part of the gain attributable to the expenditure.
If you plan to develop your property prior to sale it could be worth transferring it to company before any work is carried out, this could help to ensure that any gain to the date of transfer will be exempt from tax.
There is a further potential risk that HMRC may view the property development as a trading activity.
This is a hot topic at the moment, here is the scenario…
You own a Buy to Let property personally but want to assign the rent to a specifically created company which you own. You are a higher rate tax payer where as Corporation Tax is 20%.
You want to retain ownership personally. You can’t transfer the property to company because Capital Gains Tax and Stamp Duty would apply. Incorporation Tax Relief isn’t available.
Can the Rents be assigned?
There isn’t a tax rule that says you must lease a property at Market Rent, so in theory, you could create a lease to your company for a period to match the letting period the company will give to its tenant and charge the company a nominal rent.
There are some issues with this for example PIM2220
Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes ( PIM2010).
Another potential problem is the mortgage which will be in the Landlords name, not the Company name, so the rent would have to cover the mortgage payments, which means it won’t help with the new interest restrictions coming in soon.
This will be a connected party lease and subject to SDLT at market value but as the period will be short its unlikely that SDLT will be payable.
However (SDLTM17035), the renewal of a lease will not be treated as linked with the original lease at all for stamp duty land tax (SDLT) purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:
contained no right or compulsion of either party to renew and/ or
was renewed following entirely new negotiations, as would apply to a new tenant.
Otherwise, where leases of the same premises are granted:
between the same or connected parties
to take effect one immediately after the other
whether at the same time or not
these are successive linked leases for SDLT purposes, with tax calculated under the provisions of FA03/SCH17A/PARA5. Refer to SDLTM17040 for details.
Other Problem Areas
The company will be a closed company so if it carried out improvements to the property these could be taxable benefits to shareholders
Once the company has the rents and the profits how will you extract them tax efficiently
There are many reasons why residential property investors are now rushing to incorporate, the biggest reason being the Restriction of Mortgage Interest Tax Relief.
Clause 24 of the Finance Bill sets out plans is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows
2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%
2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21 100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
When you sell or give a residential property to your Company you will incur Capital Gains Tax if you make a gain, its for this reason many investors and their advisers believe that they are ‘automatically’ entitled to claim Incorporation Tax Relief, but in many cases Incorporation Tax Relief will NOT be available!
In summary Incorporation Tax Relief allows Sole Traders to postpone/hold over a gain by transferring all their business assets into a limited company in return for Shares.
The key problem area is the Property Investment is generally not considered to be a Trade.