We’ve put together a useful guide on how to reduce your Capital Gains Tax when selling investments or properties, but we’re also going to explain the system so you get a better understanding of what it’s about.
If you’re planning on buying and selling investments or properties then you have a myriad of different taxes to worry about.
Whether it’s income tax, VAT, additional dwelling supplement, Land and Buildings Transaction Tax, rates/council tax or other taxes, you need to consider all of the money that you’re going to be giving away in taxes when you make the sale before you finalise the pricing on your property and the date of the sale, the latter could be crucial.
But in addition to those taxes, you also need to pay Capital Gains Tax – yet another reduction in your profit when selling a property.
But not everyone is completely clear about capital gains tax, what it is or how it’s even calculated.
What is Capital Gains Tax?
Capital gains tax happens when the price of an item you sell is greater than what you paid for it.
This is otherwise known as the base cost of an asset.
So as an example, if you buy and sell a property for a higher price while making no change to it, then you’re charged a capital gain tax subject to nil rate tax bandings.
However, if you’ve made some kind of improvement to the item you’re selling, then the cost of the improvements will increase the base cost.
The amount you’re taxed on is only what has increased since you bought the item.
If you bought an item for £20,000 and sold it later for £30,000, you will only be taxed on the £10,000 which is also the “gain”.
In UK law, Capital Gains Tax is charged when you “dispose” of an asset which includes selling it, giving it away, swapping it or even getting compensation for it such as an insurance payout.
However, you’re not charged Capital Gains Tax if gifts are passed between husband and wife, if the transfer of assets is between civil partners, if it’s a donation made to charity and also if you have Capital Gains Tax losses from the previous years which wipe out the gains.
It’s good to remember that everyone has a Capital Gains Tax annual allowance of £12,000 for the year to 5th April 2020. This allowance usually increases slightly each year.
This applies to both people in a couple which means that of jointly owned assets £24,000 could be tax-free per year.
Reducing Your Capital Gains Tax When Selling Investments or Properties
In this section, we’ll explain a couple of tips on how you can reduce your Capital Gains Tax bill when you sell investments or properties.
Getting Your Partner Involved
We’ve mentioned already that each person has a Capital Gains Tax allowance of £12,000 and that this can double if you get your partner involved, potentially giving another £12,000 at NIL tax rate.
This is one of the most common ways to lower your Capital Gains Tax bill, and there are also other tricks such as buying and selling shares on the market between partners and moving them back after.
However, the simplest and arguably one of the biggest savings is simply owning assets jointly to save you up to £12,000 in taxes.
I would like to take this opportunity, to relate to a recent visit I had from the VAT Compliance Officer, its satifactory conclusion and the large part played in it by my accountants at Wagner Associates in Glasgow.
Having received notification that, I would be getting a visit from the VAT Officer to audit my business transactions and Vat payments for the last 3 years, I had to provide the necessary documents and paperwork for the meeting for him to analyse. WAGNERs verified what was required for this meeting and what would be required to be presented to the inspector, both from his records and my business details from previous 3 years paperwork.
During the period prior to the visit, I received a great deal of assistance from WAGNERs to help me get things organised properly at my end to ensure the correct paperwork was available during the inspection.
Leo Wagner was present with his records at the inspection meeting held at our premises, which I was very relieved about. The result of the visit was a very satisfactory conclusion from the inspection, with no further action.
I am very glad to have had the help of all the staff at Wagner Associates, and the professional presentation from Leo Wagner impressed the inspector, who made comment on this in his concluding remarks, and I believe went along to the satisfactory result.
Thanks you once again Leo
Paul HartDirector of HB Electrical Installations Limited
Write Down All of Your Deductible Costs
Many people seem to forget that you can deduct the costs of buying and selling an investment or property such as estate agent fees, when it comes to reducing Capital Gains Tax.
This can amount to thousands especially if it’s the buying and selling of an expensive home that you have invested a lot of money in to.
As long as you write down all of your deductible costs and don’t forget about them, you’ll find that there is a lot of money that you could use as a deductible costs when selling your assets.
Let’s say you paid £80,000 for an investment property.
Since then, you’ve spent around £10,000 on improvements which made it much nicer, and you also paid around £5,000 in fees to estate agents.
This makes your total investment £95,000.
Now that you’ve sold it for £180,000, you’ll achieve a capital gain of £85,000.
Utilising Private Residence Relief
If you own a home that was eventually sold and you lived in it for a period of time, then you could receive tax relief for the period that you lived in it plus the last 18 months.
For instance, if you own a home for 20 years and sell to earn a profit of £200,000, but you only lived in it for 15 years with the last 18 months that you owned it, then you get private residence relief for exactly 16.5 of the years which amounts to (82.5%) of the total time.
This means you’ll be taxed for only 17.5% of the profit which is £35,000 subject to other reliefs as well.
Do bear in mind that you can only officially have a single private residence at any point in time.
This means if you own a second home you will not be able to avoid paying Capital Gains Tax on it if you sell it unless you had elected with HMRC this to be a principal private residence.
There is sadly nothing that can be done about this after the event, but you might be able to do something whilst you own both properties.
Definitely worth having tax planning discussion with an accountant.
There are also several periods that may still qualify for private residence relief.
For instance, if you are absent for whatever reason for a period under 3 years then it may still count as private residence relief time despite your absence.
This can be increased to 4 years if your employer has required you to work away from home or when the distance of your workplace is too far for you to live practically in your main residence.
Any time in which you’re employed in the United Kingdom yet outside of the country doing work also counts as your main residence.
By utilising these times and extending your period of private residence relief, you can save a significant amount of money on your Capital Gains Tax.
Lettings Relief When Selling an Investment Property
One way to reduce Capital Gains Tax on a property is with lettings relief.
If you rented out your home or a portion of it then you may need to pay tax on the portion that was let out when you sell the property.
However, if you can prove that it was still your main residence for a period of time then you’ll be entitled to letting relief.
However, do keep in mind that you cannot claim both private residence relief and letting relief during the same short period of time.
For example, if you’re letting the property when you decide to sell it, then the past 18 months will count for private residence relief and not letting relief.
The amount you can save with letting relief depends on how much you sell your property for.
Use a Capital Gains Tax Calculator
There are now calculators out there that will help you figure out how much Capital Gains Tax you’ll be paying in addition to where you could potentially make savings.
This could potentially save you a large chunk of money off your Capital Gains Tax bill, and will generally give you a fantastic visual representation of how you can further reduce your Capital Gains Tax bill when you sell a property.
Hopefully, this article has shown you a couple of ways on how you can reduce Capital Gains Tax when you’re selling investments or properties.
It’s always recommended that you to use some kind of tool such as a calculator or even hire a dedicated accountant that can sort these equations out and ensure that you’re getting the best Capital Gains Tax savings as possible.