FAQ Tax Questions
Capital Gains Tax
Capital Gains Tax
What is 'Principle Private Residence relief'?Principle Private Residence Relief is the tax legislation that deals with exempting from Capital Gains Tax the proceeds on the sale of one's only or main residence.
The rules and Revenue practice in this area are highly complex however with careful planning they can be combined with other exemptions and reliefs to mitigate or completely avoid capital gains tax liabilities arising on investment property.
Is Capital Gains due if I sell my own home?Generally, any gain accruing to an individual on the sale of his or her only or main residence is exempt from Capital Gains Tax.
At what rate do I pay Capital Gains Tax?A chargeable gain after annual exemption realised by an individual property investor is treated as their top slice of income and tax will be applied at the income tax rates of 10%, 20% and 40%, as appropriate.
What is Capital Gains tax?Capital Gains Tax (CGT) is a levy that may need to be paid when you sell certain assets, including property, shares or other investments such as antiques, art and cars.
Typically, a capital gain is generated when an asset or investment is sold, but it can also occur when a gift is made or even when a competition prize is won.
Does a buy-to-let landlord (i.e. long-term property investor) have to pay Capital Gains Tax?Generally, a buy-to-let landlord will be subject to Capital Gains Tax on the sale of an investment property although with careful planning the CGT charge can be mitigated and, in some circumstances, completely avoided.
Does a property trader (i.e. somebody who develops and re-sells property) have to pay Capital Gains Tax?No, Capital Gains Tax will not apply to a property trader who buys, develops and re-sells property.
Will I be taxed on the sale of a property received as a gift?
Will I be taxed on the sale of a property received as a gift?
I'm neither UK resident nor a UK citizen. In 2010, I received a property in the UK from my mother as a gift. She is neither UK resident nor a UK citizen and owned that property since 1974. I'm now in need of selling that property. Am I liable to pay capital gains tax (CGT) or any other kind of taxes on the property transfer?
Since you received the property as a gift from your mother in 2010, its value in 2010 is your base cost and therefore your capital gain (i.e. the increase in value from its market value in 2010, until now) is not likely to be that big. But even without that, since you are non-UK resident when selling the property you are not liable to CGT in the UK on the sale. If you were non-UK resident in the tax year you received the property, and you sell the property while non-UK resident, then even if you come to live in the UK afterwards and become UK resident, you will not be liable to any CGT in the UK on this property.
Will essential repair costs reduce my capital gains tax liability?I am selling a house which I have owned for three years in Bath, which was transferred to me by my husband. It is let in three flats. It was valued when I acquired it at £800,000, and I am selling it for £925,000 for completion of the purchase on 1 July 2018. I am 70 years old and would like clarification on the likely capital gains tax which I would be liable for. I have spent some £100,000 on essential repairs and renovations since owning the house
Arthur Weller replies:
The answer to your question involves determining the nature of your £100,000 expenditure. If it was wholly capital expenditure, it can reduce the £125,000 capital gain to £25,000. If none or only some of it was capital expenditure then the £125,000 will not be reduced, or only partly reduced, accordingly. Look at HMRC’s guidance at: www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2025 and pim2030 to find out what is capital expenditure, and what is not.
What is Inheritance Tax (IHT)?Inheritance tax is commonly referred to as a 'gift tax' or 'death tax.'
If at the time of your death you pass on part or the whole of your estate, then the inheritor could be liable to pay inheritance tax.
There is currently an IHT threshold level of £285,000 for the 2006-2007 tax year. Anything above this amount is taxed at 40%, i.e., at the highest rate.
This means that if at the time of death your whole estate is valued at less than £285,000, the inheritor will have no tax to pay.
If the value of the estate is over this amount, then anything above the £285,000 will be taxed at 40%.
Why is IHT becoming a tax liability that people are increasingly and seriously starting to worry about?This is primarily down to the recent house price boom.
Given the boom of property house prices of the past few years hundreds of thousands more homeowners have already fallen into the Inheritance Tax trap - which means that IHT will be due when they die.
Here are some interesting facts that demonstrate how seriously an issue IHT is becoming:
Firstly, in the first six months of 2004 alone an additional 500,00 homes went above the current IHT threshold. This means that the Inland Revenue will demand tax when the property owners die.
Secondly, new figures show that around 2.4 million people will be liable for IHT when they die. Only a few years ago, the number of people who were liable for this tax was just a fraction of this.
Thirdly, high property prices are normally associated with the South. However recent research by the Halifax bank has shown that 60% of properties that have risen above the IHT threshold are outside London and the South East. This demonstrates that IHT is no longer a tax that is associated with people in the south, but is in fact a tax that is becoming more commonly associated with those living outside this area as well.
Finally, the estimated number of properties now worth more than the inheritance tax threshold is four times greater than what it was in 1997. If the IHT threshold had risen in line with house price inflation then the current threshold level would be closer to £400,000, but instead it is only currently at £263,00. Again this demonstrates that more and more people are falling into the Inheritance Tax Trap.
Is it true that Inheritance tax is a 'voluntary tax' and therefore can be legitimately avoided?In a nutshell this is true. If one plan's his or her estate properly (and avoids a premature death), there is absolutely no reason why they should pay any IHT whatsoever.
Roy Jenkins the former Labour Chancellor of the Exchequer famously described IHT thus:
"... it is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue..."
Why is it necessary to have a will?Simple will planning is often the cheapest and most effective form of IHT planning. It also saves your family a lot of problems after you have departed.
Many people assume that their estate will pass to their surviving spouse in the event of their death. This is simply untrue. The intestacy rules will distribute the estate in accordance with a formula laid down in law depending on the size of the deceased estate and their surviving relatives. It is therefore imperative that a will is in place. In the case of unmarried couples, without a will the survivor has almost no rights whatsoever.
However, under present rules it is possible to write a posthumous will providing the all of the beneficiaries agree.
If I die tomorrow and leave my entire estate to my wife, will she have to pay IHT?No. All gifts between husband and wife are exempt from tax as long as they are both domiciled in the UK.
This means that even if a husband has an estate valued at £10 million pounds, then he can gift this to his wife.
It does not matter if it was gifted during his lifetime or at the time of his death; either way, his wife will incur no tax liability.
What are some simple actions I can take to reduce IHT?The following answer has been taken from the interview with Nigel Lord about 'How to Avoid Inheritance Tax.' This interview is just one of the Five interviews in the Property Tax Experts product.
First and foremost, it is essential to have an IHT efficient will. This is particularly important for married couples. In my professional capacity, I meet around fifty couples a year whose wills are written in such a way that they 'volunteer' to pay an additional IHT bill of over £105,000 because a simple will trust clause costing a few hundred pounds has been omitted.
Perhaps the second easiest and least costly planning method is to ensure that a proportion of the family home is transferred to resident children. This can be achieved using a family trust thus enabling the parents to retain effective control of their principle asset. This is quite a complicated issue and can have serious adverse Capital Gains Tax and Stamp Duty effects if implemented incorrectly, as well as being ineffective for IHT mitigation. It therefore should only be undertaken with appropriate professional guidance.
The next obvious planning method involves gifting assets to the next and future generation either directly or via some form of trust. It is quite possible to do this without relinquishing control of the asset, and in certain circumstances retaining an individual right to income.
Do back taxes prevent the sale of a house?
My mother died 2 years ago and gave me her flat in London. Now, as I try to sell it seems there are back taxes that need to be paid first in order to sell it. Is it true that I can't move on with the sale until I pay those back taxes? Can I take the back taxes off the revenue I get from the sale?
Arthur Weller replies:
When a person dies someone has to take responsibility for dealing with their property, debts and distributing the estate. The person who administers any part of an estate situated in the UK normally needs proof of legal authority to be able to do so. They get this legal authority by obtaining a grant. Before a grant is issued any inheritance tax (IHT) that is due must be paid. I think that this is what you mean by 'back taxes'. IHT that you may need to pay cannot be taken off the revenue you get from the sale.
What is income tax?Broadly, income tax is a tax on the worldwide income of UK resident persons, subject to a few exceptions. Income tax, in common with all UK taxes, is imposed by legislation enacted by Parliament. Income tax is chargeable on earned income from employment and self-employment, rental income from land and property, savings income and dividend income.
Does a buy-to-let landlord (i.e. long term property investor) have to pay income tax?Yes, a buy-to-let landlord has to pay income tax to the extent that the income from their property rental exceeds the allowable expenses.
Does a property trader (i.e. somebody who develops and re-sells property) have to pay income tax?Yes, a property trader is subject to income tax to the extent that the income from their property development and re-sale exceed the costs of development and re-sale. Many property traders set up a company to minimise their tax liability.
At what rate do I pay income tax on my property profits?Depending on the level of your other income, you will be subject to income tax on property profits at one or more of the following tax rates, namely 10%, 22% and 40%.
What typical costs can I offset against my property income?Broadly, you can deduct any business expense that is incurred for the purposes of earning profits from letting or developing property. 'Capital' expenditure is not deductible although special allowances are available.
Common examples of deductible business expenses include:
When is income tax due?Property investors and traders subject to income tax will be required to make two equal payments of income tax on account on 31 January in and 31 July following the tax year. Any outstanding balance of income tax and the whole amount of capital gains tax is due on 31 January following the tax year.
What would be the tax consequences for any of the parties?We are looking to buy our next property but the current property, which we bought using a ‘Help To Buy’ equity loan, is not having many viewings. To help us, our in-laws have offered to buy the property with cash at the original purchase price so that we can be chain-free and not incur the second home stamp duty land tax (SDLT) supplement (as there is a very real chance of completing on the next property before we have sold this one). Is it legal to sell the property to them at the original purchase price or even at a lower price and are there any tax consequences for any of the parties?
Arthur Weller replies:
It is certainly legal to sell the property to them at the original purchase price, or even at a lower price, but for capital gains tax purposes it is deemed that you are selling to them at today's market value. See www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14530. This should not cause you a problem, because I would imagine that any capital gain you incur by this sale is covered by principal private residence relief (PPR). However, I would suggest you think twice about this arrangement because your in-laws will have to pay SDLT on the purchase of the house from you, based on the amount they actually pay you. Furthermore, according to the new rules, if you only sell your current main residence after purchase of a new main residence, as long as it is within three years, you can get a refund of the extra 3% SDLT. See www.gov.uk/government/uploads/system/uploads/attachment_data/file/508272/GuidanceNote_Final.pdf, at section 3.25.