Sarah Bradford examines the capital gains tax charge that might arise on the disposal by an individual of a buy-to-let property.
In most cases, no capital gains tax (CGT) is payable when you sell your only or main home, regardless of the size of the gain; the same is not true where an investment property, such as a buy-to-let or a holiday home, is sold or otherwise disposed of realising a gain.
However, with some forward planning, there are steps that can be taken to minimise the amount of CGT that is payable.
1. Live in it for a time as a main residence
There is a lot of benefit to be had in living in a property as a main residence for a time, as this opens up not only the possibility of the main residence exemption but also shelters the final period of ownership and brings lettings relief into play.
When it comes to qualifying as a ‘main residence’, it is quality not quantity of occupation that counts. HMRC may look for evidence that the property is actually lived in as a main home; for example, is this where the post is sent, if there are children do they go to school locally, is the taxpayer active in the local community, etc.
Where the property is let, the period of occupation as a main residence does not have to precede the let – it can take place between lets, or after the last let and before sale. So, if a property has been let and has not been lived in as a main residence, all is not lost. It can potentially be occupied prior to sale to bring the tax exemptions into play.
Main residence relief is available to shelter the gain for the period during which the property has been occupied as the only or main residence. It is also available for the final period of ownership. This is currently 18 months, although it was announced in Budget 2018 that it will be reduced to nine months from 6 April 2020.
2. Claim lettings relief
Lettings relief is available where a gain arises on the disposal of a property where:
• at some time it has been the individual’s only or main residence;
• during the period of ownership, all or part of the property has been let as residential accommodation; and
• a chargeable gain arises as a result of the letting.
Currently, the amount of the relief is the lowest of the following amounts:
• the amount of private residence relief;
• £40,000; and
• the amount of the chargeable gain arising as a result of the letting.
It should be appreciated that lettings relief is only available for a property that has, at some time, been an only or main residence. If the property has been let throughout (for example) where it was bought as a buy-to-let, used as such and then sold to benefit from the capital growth, the relief is not in point.
It was announced in Budget 2018 that lettings relief is to be curtailed from 6 April 2020. The government is to consult on the detail, but the stated intention is to restrict it to ‘properties where the owner is in shared occupancy with the tenant’.
3. Put the property in joint names before the sale
Individuals are entitled to an annual exempt amount for CGT purposes, set at £11,700 for 2018/19 and rising to £12,000 for 2019/20. Where a property is jointly-owned, there are two annual exempt amounts available to shelter the gain, saving tax of up to £3,276 for 2018/19 (i.e. £11,700 @ 28%).
Transfers of assets between spouses and civil partners are deemed to be at a value that gives rise to neither a gain nor a loss, so putting a property in joint names will not trigger a CGT liability. However, care should be taken if there is a mortgage on the property and that too is put in joint names as, depending on the value, this may trigger a stamp duty land tax bill (in England and Northern Ireland), as there is a transfer of valuable consideration.
In some cases, it may be better to transfer the property in its entirety to the other spouse or civil partner, if (for example) the person paying tax at the higher rate has used his or her annual exempt amount and the other partner has both the annual exempt amount available and pays income tax at the basic rate. Crunch the numbers to see what works for your situation.
4. Sell before 6 April 2020
It was announced at the time of Budget 2018 that, from 6 April 2020, the final period exemption will be reduced from the current 18 months to nine months (but will remain at 36 months where the taxpayer is disabled or moving into care), and that from the same date lettings relief is to be curtailed.
The detail is not yet known, but the start date of April 2020 gives time to plan ahead. Selling prior to that date could preserve the current, more generous, reliefs.
Example: The benefit of tax planning
Kevin
Kevin purchased a property as a buy-to-let investment on 1 January 2012. He sold the property on 31 December 2018, realising a gain of £60,000. He is a higher rate taxpayer and he makes no other gains in 2018/19.
The chargeable gain after deducting the annual exempt amount is £48,300 and the capital gains tax payable is £13,524 (£48,300 @ 28%).
Stacey
Stacey also buys a buy-to-let property jointly with her husband on 1 January 2012, which they then live in the property for a year, before letting it from 1 January 2013 until it is sold on 31 December 2018. They too realise a gain of £60,000. Both are higher rate taxpayers.
In this case, main residence relief is available for 2012 (12 months) and for the final 18 months of ownership – a total of 30 months.
The property is owned for seven years (i.e. 84 months).
The gain sheltered by main residence relief is 30/84 x £60,000 = £21,429.
Lettings relief is available for the lower of:
- the amount of private residence relief (£21,429);
- £40,000; and
- the amount of the chargeable gain arising as a result of the letting (£38,571)
i.e. £21,429.
The chargeable gain after allowing for main residence relief and lettings relief is £17,142 (£60,000 - £21,429 - £21,429). The gain arises equally to Stacey and Joe - £8,571 each. However, as they both have their annual exempt amount available, which is more than their share of the gain, there is no CGT to pay.
The outcome for Kevin and Stacey is very different despite both realising a gain of £60,000 over the same period on a property bought as a buy-to-let – by planning ahead, Stacey (and Joe) can enjoy the gain tax-free, whereas Kevin must pay CGT of £13,524.
Looking ahead
From April 2020, landlords will have to make a payment on account of CGT when they realise residential chargeable gains. The payment must be made within 30 days of completion and a return must be filed with HMRC in the same timeframe.
Practical Tip:
As the above shows, living in a buy-to-let property as a main residence for a period of time can pay massive dividends when it comes to selling the property. However, in light of the changes announced in Budget 2018, the window of opportunity to take advantage of the current reliefs is limited.
