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In this post, we will be answering some tax questions about capital gains tax. Here, learn how other landlords have worked out their CGT, how they minimise this tax bill, and how capital gains tax can change if you move abroad.
How Do I Work Out Capital Gains Tax (CGT)?
Question:
I have two houses, both on buy to let mortgages, and I am thinking of selling one house; can you please tell me about CGT and how is it best to work this out because I have a mortgage on the house.
Answer:
CGT is calculated on the difference between the sale proceeds and the acquisition value/ price, i.e. how much you get for selling it and how much you paid for it. The fact that you have a mortgage, or how much the mortgage is, is not relevant to CGT in normal circumstances (this is a mistake that many people make – you are in good company!). The mortgage is relevant to CGT only in a scenario in which the purchaser takes over the mortgage from the seller, as part of the deal. In such circumstances, tax law adds the amount of the mortgage taken over to the amount actually paid by the seller to determine the final selling price. See www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12706, on HMRC Capital Gains Manual.
How Can I Make Sure I Pay Minimal Capital Gains Tax?
Question:
I live with my wife and the house is in her name. In the meantime, I have bought two residential houses in my name, not with buy-to-let-mortgages, and have rented them out. The houses were bought from an investment point of view. I bought one house nearly three and a half years ago, and the other house one and a half years ago. I don’t mind changing to buy to let mortgages, but before I do that I want to make sure that I should be paying minimal capital gains tax when I sell. How can I do that? We are both in the higher tax paying group.
Answer:
From what you described in your question, it would be a good idea to make your wife a joint owner a short time before you plan to sell a property. That way you will have the advantage of her capital gains tax annual exemption to reduce the gain on sale. This will save tax on that amount at 28%. If you have children and you don’t mind giving them a bit of the property, you could give them a small portion of the property up to an amount that you don’t pay any capital gains tax on the transfer, i.e. so that the gain on the transfer is equal to your annual exemption. Then, when you eventually sell the property, you can utilise their annual exemption(s) as well.
Can I Defer Capital Gains Tax?
Question:
I am about to sell a buy-to-let property that has made a £40,000 gain. But I am looking to re-invest this money back into another two more properties. Because I have re-invested the money can I defer paying any tax that is due on the £40,000 profit?
Answer:
This is a very commonly asked question and one which is often misunderstood by many people. Once you have disposed of the buy-to-let property then you are liable to pay capital gains tax. This is regardless of whether you have re-invested the profits or spent the money. There are only two exceptions to this. One is ‘Furnished Holiday Lets’. The other is if the property is the subject of compulsory purchase (or compulsory acquisition by a lessee).
When Will Capital Gains Tax Be Calculated From?
Question:
My friend lived in her house for 30 years. She then married and moved overseas, letting it last year. Will she now be liable for capital gains tax (CGT) for the whole 30 plus years, or just since April 2020?
Answer:
Since she is now a non-UK resident; assuming she stays non-UK resident for five consecutive tax years, she will only be liable for the gain from April 2015 onwards. However, she lived in the house as her main residence until 2019, so these years will be exempt. The last nine months of ownership are also exempt (final period exemption) (see HMRC’s Capital Gains manual at www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65070).
For more tax questions and answers, check out ‘247 Property Tax Questions Answered’ included in the Landlords’ Tax Pack. In this book, Arthur Weller answers more Property Tax Questions based on real life scenarios.
