Personal Allowances & CGT:

Investors and second home owners, and landlords, will be pleased to hear one piece of good news in this November’s budget: the Chancellor has raised the personal capital gains tax (CGT) allowance which means individuals will be able to will be able to keep more of their gains when they sell an asset – usually shares and properties.

The CGT threshold is to be increased by, £400 from £11,300 to £11,700 per person. This means that a married couple or civil partnership with jointly owned assets will have an extra £800 of gains tax free on asset disposals.

This is a small but welcome benefit for landlords after several budgets where they have faced extra taxes and will allow them to keep more of their money when they realise their gains.

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Married couples and civil partners have the advantage of being able to transfer assets between each other without triggering a capital gains tax charge. This means that they can chose to transfer ownership, or a proportion of ownership, prior to a sale to give maximum tax benefit between them: by utilising a couple’s annual exempt amounts fully potential tax bills can be cut further if one in the couple pays a lower rate of tax.

The other piece of good news for landlords is that the Chancellor is delaying until April 2020 the requirement to pay CGT within 30 days of a sale. Currently landlords have up to 12 months to pay on the disposal of a property.

For foreign investors the news is not so good: for the first time they will be forced to pay CGT (non-resident gains) on the sale of UK commercial property.

What is Capital Gains Tax?

Capital gains tax (CGT) becomes payable when individuals make a profit (gain) from an asset such as a second property, shares or family heirloom.

The Budget 2016 reduced the tax rates payable on capital gains, but unfortunately, not for residential landlords when they sell their investment properties. Basic rate income taxpayers are now liable for CGT at 10% (previously 18%), while those on higher rates of income tax pay 20% (previously 28%) – applicable from April 6 2016.

However, and this is the “sting” for residential landlords, there are higher rates for gains made on the sale of residential investment properties. For landlords therefore the rates have remained at 18pc for basic rate payers and 28pc for higher rate payers.

Calculation of Liability?

Capital gains on the sale of an investment residential property (buy-to-let or holiday let) are subject to CGT but can deduct your allowances and certain expenses.

Example: A couple purchased a property in joint names for £450,000. £40,000 was spent on providing an extension to the property and £5,000 on improvements and it sold for £650,000. The gain is £200,000, but you can deduct and capital expenditure you made such as improvements, stamp duty, legal fees on purchase and sale, and estate agents’ fees.

The Calculation:

Purchase price £400,000
Sale price £650,000
Capital Gain £200,000
Deduct:

–          Extension

–          Improvements

–          Stamp Duty (purchase)

–          Legal Fees (purchase)

–          Agent’s Fees

–          Legal fees (sale)

–          Combined Allowances

 

£40,000

£5,000

£10,000

£2,500

£1,500

£2,000

£23,400

Total deductions £84,400*
Gain subject to tax £115,600
Each spouses’ liability £57,800

 

*This demonstrates the important of keeping safe all documentation concerning property purchases, sales and capital expenditure, as it will definitely be needed for tax purposes.

Depending on these two joint owner (landlords’) personal income tax status, they will pay either 18% (basic rate tax payer) or 28% (high or higher rate tax payer) £10,404 or £16,184.

Selling all or a part of a property business is also subject to CGT but in some cases you may be eligible to claim entrepreneur’s relief at 10pc.

Before making any decisions regarding disposals of property and CGT you should consult a tax specialist – these figures are only a general guide.

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