Capital Gains Tax on Investment Property

capital gains tax

Our guest blog this week is from accountancy firm Purple Lime. Their experts have provided a comprehensive guide to capital gains tax on investment properties. Capital gains tax is a consideration for any individual who owns investment property or has significant business assets as part of their trade. It can also be a factor for individuals who would not consider their tax affairs to be within the scope of capital gains, i.e. owning a holiday property as well as their own home or simply having a rental property.  

Capital gains tax, traditionally, becomes the relevant tax legislation when there are considerable values involved. There can be significant tax consequences if it is not considered. However, there are tax planning opportunities that, if they occur before a transaction happens, can provide benefits.  

With capital gains tax being a broad and complex subject, it is important for any individual or business owner to seek professional advice from their accountant when considering tax planning.  The following items represent a selection of planning options that can be considered.   

Annual allowance 

The first step is to make sure the annual allowance that an individual has is utilised. The annual allowance for the tax year 2021/22 is £12,300 per person. This brings discussion around ownership of the asset that is to be disposed of. For example, having the ownership split between two individuals will mean that the first £24,600 of any gain will incur no capital gains tax, subject to other earnings during the tax year.  

This should be considered as the transfer between a couple that is married or in a civil partnership is at no gain or loss and so can provide the option to transfer the ownership of the asset.  

Base cost and selling costs 

It is imperative that appropriate records are kept in order to utilise this planning option. The base cost is the amount paid for the asset. However, when calculating the gain, you are looking to deduct your base cost from the sales price.  

It is allowable to include certain items that increase the base cost which will further reduce the gain. These can include such things as fees for valuing or advertising the asset being sold, costs of improving the asset and taxes such as stamp duty land tax and VAT.  

However, you can only claim costs for which you have not already claimed income tax relief for. In addition, you can only include VAT that you not previously reclaimed. 

Timing of disposal 

This can sometimes be out of your control, but if you are disposing of an asset in which a gain is being calculated, it is a useful exercise to assess whether your income for that year is going into the basic or higher rate tax threshold.  

The capital gains tax rate for a basic rate taxpayer is 10% (or 18% on residential property) whereas the capital gains tax rate for a higher rate taxpayer is 20% (of 28% on residential property). 

Therefore, the key is to determine your income in respective tax years to assess whether there is an optimum tax year to dispose of an asset.  

Utilising losses 

Another simple technique is to assess other assets you hold to see if any of them are currently carrying at a loss. The reason is that you can offset capital gains against capital losses even though they are from different classes of assets. Also, it would be worth checking to see if you have any brought forward capital losses to utilise as losses brought forward can be offset against current year gains.  

Reporting and paying capital gains tax  

This represents an overlooked element of the capital gains tax regime. If you make sale of any UK residential property, you need to report and pay the appropriate tax within 30 days of the date of disposal. You need to submit this report even if you have no tax to pay.  

Whereas for any gain from other assets, you can either report by the ‘real time’ Capital Gains Tax Service or by completing it on your own self-assessment tax return. If you use the ‘real time’ Capital Gains Tax service, you need to report it by the 31 December after the tax year the gain is made.  

Other reliefs 

There are number of other reliefs available which can be used to reduce or defer the tax gain. They each warrant further review and you would need to seek the appropriate accountancy advice before pursuing these. The reliefs in question are Business Disposal Relief (previously known as entrepreneurs’ relief), Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). 

About Purple Lime 

Purple Lime are part of the new wave of accountancy firms, taking on stand-alone tasks or acting as your outsourced finance department depending on your business needs. They take a different approach to accounting, putting you at the heart of everything they do; they want to get to know you, your business and your hopes and ambitions. 

They take a proactive approach and will keep in touch regularly throughout your accounting year, giving you the financial edge over your competitors. Whether you need a one-off piece of tax advice, accounting help, or an ongoing accounting presence dealing with the day-to-day issues, Purple Lime are here to help make your business a success. 

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