Our client bank consists of many different types of property owner: those that buy property as a place to live, those that buy for investment purposes, those that through circumstances become accidental landlords, those that choose to make a living through buying, developing and selling property. What they all have in common is that at some stage they will contemplate selling their property and at that stage they will usually start to consider the tax implications.
The first thing to say is that in most of the situations above, the sale would be deemed a capital disposal because the property has been held for purely investment purposes and is therefore liable to capital taxes which we detail in this article. However there will be situations where the property owner is buying and selling the property in order to generate a profit. This will constitute trading and as such falls under a different set of tax rules where any profit would be liable to income tax and national insurance. See our previous article called the ten most common mistakes made by property developers for more details on this and several other property tax issues.
For most property disposals there are two main taxes that you need to be aware of. Capital gains tax (CGT) and inheritance tax (IHT). CGT is generally payable at a rate of 10% or 20% for commercial property and 18% or 28% for residential property disposals. IHT is payable at 20% on gifts or sales at undervalue to companies or trusts.
This blog concentrates on specific areas and reliefs available to raise awareness of the capital tax considerations of property transactions.
Principal residence relief
This relief is widely used and well known. In its simplest form it exempts from capital gains tax (CGT) most gains made on the disposal of a property that has always been your main residence. In the right circumstances you do not need to worry about declaring the gain you make or paying any tax at all.
You may have noticed that I refer to ‘most gains’ – that is because some disposals of a home that has always been occupied as a main residence will be subject to tax. Where the land comprising garden and grounds exceeds the permitted area of 0.5 hectares there may be tax payable on part of the gain. It does depend however on the type of house involved because the permitted area can be exceeded where the area required for the reasonable enjoyment of the residence, having regard to the size and character of the house, is larger than 0.5 hectares. This is a specialised area of tax however and I would strongly recommend that you take professional advice if you find yourself in this position.
The other consideration with the sale of your home comes when the property has not been your main home throughout the period of ownership. For example you may have lived in it when you first bought it but then kept it for rental when you upsized your home. In those circumstances the principal residence relief will be partial and you may well need to pay tax on part of the gain.
Then there is the situation where you own two or more homes; typically you may have a ‘main’ home and a holiday home that you visit at weekends or for weeks in the summer. Where that is the case you can nominate which residence will be your principal residence for CGT purposes, as long as the nomination is made within two years of the latest purchase (or two years from when the latest home is habitable if later). Once you have made a nomination you can vary it at any time. In theory one home could be nominated on day one and another home nominated on day two. This is the practice commonly known as ‘flipping’ and it is often used by MPs who own properties in their constituency as well as near parliament. The advantage to make the nomination is that once a property has been your principal residence at any time the gain on disposal will automatically qualify for the last 9 months of relief. That will reduce the overall CGT payable on disposal.
You should be aware that a married couple or civil partners (unless they are legally separated) can only have one main residence between them. This is the case even in rare situations where in actual fact they live in separate homes. Only one of those homes can be the couple’s principal residence at any given time.
For non UK residents there is an over-riding rule that they can only claim principal residence relief for any year in which they spend more than 90 days in the UK. This usually means they will only qualify for the CGT relief in a year in which they are UK resident and therefore liable to UK income tax on their worldwide income.
Gifts of property
There is a common misconception that no tax is payable if you do not receive any money for gifting your property. Unfortunately, this is incorrect. When a gift is made to an individual the proceeds are substituted with the market value of the property. There is no holdover or rollover relief available so CGT needs to be paid in full on any gain made. The inheritance tax (IHT) position is better as the gift would be a potentially exempt transfer. That means no immediate tax bill and the gift will be completely exempt if you survive seven years.
Use of trusts
One way of deferring any CGT payable would be to use a discretionary trust as a vehicle to pass property on. If a gift is made into a trust instead of an individual you can holdover the gain so that no immediate tax is payable. For IHT there would be an immediate 20% tax charge but this can be avoided if the property value is less than the available nil rate band of £325,000 (for properties worth more than that figure the tax is 20% of the excess). Couples have a nil rate band each so a property worth up to £650,000 could be put into trust in this way.
You could then transfer the property out of the trust into the hands of your intended beneficiary and again the gain could be held over. That means they would only pay tax when they disposed of the property, although their base cost would be whatever you paid for it originally.
There are costs involved with setting up, administering and winding up a trust so you would need to think carefully before going down that route, however in the right circumstances the tax savings could be substantial. Do seek professional advice if you are considering using a trust for tax saving purposes.
Furnished Holiday Lettings
Furnished holiday lettings (FHL) are properties that are available to let for at least 210 days and are actually let for at least 105 days in any tax year and they cannot be let for more than 31 days to the same person. There are reliefs available where the FHL is part of a portfolio of FHLs and where the qualifying conditions are met in some years but not others. If your property does qualify for FHL status there are some useful tax reliefs available.
For capital purposes any disposal of an FHL will qualify for business asset disposal relief (BADR) provided it has been held for two years at the point of disposal and the BADR relief £1 million lifetime limit has not been used with previous disposals. That means the tax rate will be 10% rather than the usual 28% which applies to most residential property sales.
The other potential tax advantage for FHL disposals is that you can rollover the gain into a further property purchase, but only if the new property is also used as an FHL.
60 day CGT Returns
Be aware that disposals of residential properties that lead to CGT being due need to be reported to HMRC within 60 days of completion and the tax needs to be paid in the same timescale. This applies to disposals by residents and non-residents alike, and also applies to property disposals within trusts or during a period of administration. The report is usually done online, although can be done in paper form in certain circumstances.
It may be that there are good reasons for transferring your properties into a limited company. Although we are not exploring those in this blog you may like to read an earlier blog here if you are interested in incorporating your property portfolio.
For properties transferred to a company there will usually be CGT payable with market value substituted for proceeds. There will not usually be any IHT payable because the loss of the value of the property in the estate of the transferor will be countered by a gain in terms of company shares or a loan account of the same value. Individuals with large portfolios of properties may in certain specific circumstances be able to transfer their property portfolio into a limited company with no CGT payable and potentially no stamp duty liabilities. This however only applies to certain landlords so please seek professional advice.
You will normally need to consider stamp duty land tax when incorporating property as this will be payable on the market value of the properties transferred and the additional 3% due on second properties will apply to all properties transferred to a company. This will be a liability of the company however so can be paid out of company profits.
If a company sells an investment property it will pay tax at the corporation tax rate in place at the time of sale. The current corporation tax rate is 19% but that is going up to 25% for most companies from 1 April 2023. If the shareholders wanted to extract the net proceeds of sale from the company they would need to pay dividend tax to do so or potentially liquidate the company to obtain the lower CGT rate for share sales of 10% or 20%.
There is a lot to think about when selling or gifting property. Make sure you seek suitably qualified advisors to help you navigate the tax issues.
The content in this blog is correct as at 15 March 2022 See terms and conditions.