CGT on the disposal of buy-to-let residential properties is not always easy to mitigate, but there are things which can be done.
Firstly, note that the headline rate of tax on gains arising from disposals of buy-to-let property is 28% (or 18% to the extent that your taxable income doesn’t use up all of your basic rate band). That is materially higher than the normal 20% (or 10%) headline rate(s) for other chargeable assets (like shares and commercial property, etc.).
Then consider these questions and the possibilities which spring from them:
- Have you at any time used (or could you at any time use) the property as your “only or main residence”?This usage, however brief, can provide you with the ability to claim exemption for a valuable proportion of the gain. The reliefs involved in this, ie private residence relief and letting relief, are due to be revised and abolished, respectively, from 6th April 2020, so potentially affected taxpayers might want to consider the timing of their disposal plans.
- In wanting to dispose of the property, are you intending to pass it “down” to others (eg to members of your family) as part of your longer-term estate management?A transfer of the property to a trust for the benefit of those family members might not only provide you with (i) continued control over the asset; and (ii) protection from a loss to the family of significant value (due to various risks including potential marital breakdown, for example); but it can also afford you (iii) a zero-taxed transfer due to a “holdover” relief which can apply to the gain.
- Are you undertaking so much letting activity that, before you make a sale of any one of your properties, we might be able to argue that you are truly “in business” as an active landlord?If that looks likely, then we might seriously consider the merits of transferring the whole of your business to a limited company. In addition to a number of other commercial, domestic, and taxation benefits, this transfer of properties can be achieved without CGT, and the properties can be “re-based” to current market value (for tax purposes) such that the taxable amount arising on any disposals shortly afterwards can be washed away altogether.
- Are you interested in re-investing some of the proceeds from the sale of your buy-to-let property, and if so, might you be willing to consider investment opportunities involving trading business (which typically comes with a higher degree of risk)?If so, this might afford you complete deferral of the gain on your disposal as well as significant other Income Tax benefits not outlined here.
The questions and ideas above are aside from the planning work which Harold Sharp undertakes routinely in the context of potential CGT on all our clients’ disposals.
That work typically involves (i) identifying all actual and potential capital losses which may be capable of offset; and (ii) maximising the use of available CGT annual exemptions (currently standing at £12,000 gain per person per tax year), also capable for offset.
By way of example, in some circumstances a married couple might be able to structure a sale transaction to straddle the 5th April and access a total of four annual exemptions (ie two from each tax year) amounting to £48,000 of exemption currently, worth up to £13,440 of tax saving, before we consider any more planning.
Two final notes:
- Taxpayers always need to be conscious of constantly changing rules in tax and, in this regard please note that from 6th April 2020, CGT arising on disposals of buy-to-let properties will give rise to tax which is then payable within 30 days of completion of the sale.This will be a significant acceleration of the tax payment compared to the current rules which require payment of the tax by the 31 January following the tax year in which the disposal took place. Furthermore, taxpayers need to be aware that the tax will be payable at that time irrespective of whether they have received the proceeds by then!
- Stamp Duty Land Tax (SDLT) represents a potentially significant taxation issue to be factored into all transfers of real estate property (albeit still chargeable on the buyer, at the moment at least). This is a tax issue which can introduce the need for additional pre-transaction planning, but is not the subject of today’s blog post.
Please get in touch with your relationship principal here, or with Tax Partner Chris Barrington, if you would like to discuss any of your CGT affairs.