How to minimise Capital Gains Tax
How to reduce Capital Gains Tax liability on property investments
As a firm of trusted accountants, Hartley Fowler LLP is proud to offer a comprehensive range of accounting services to both business and private clients.
We’re often asked to provide support with the most tax-efficient solutions including how to minimise Capital Gains Tax liabilities. This is becoming an increasingly common question, since many face hefty tax bills after cashing in their stocks and instead investing in buy-to-let property.
If you’re in need of property investment tax advice regarding capital gains, read on for our guide to this complex issue…
When do you pay Capital Gains Tax on property?
Capital Gains Tax must be paid on the profit generated when you sell – or ‘dispose of’ – an asset that has increased in value since you acquired it. In this article, we’re specifically talking about the Capital Gains Tax payable on property.
You do not need to pay Capital Gains Tax when you sell your home – this is covered by ‘Private Residence Relief’ (certain conditions apply). However, Capital Gains Tax may apply to anything that isn’t your primary home, including:
- buy-to-let properties
- business premises
- inherited properties
If the purpose of your business is to buy and sell property – that is, you’re a property developer or agent – you will not be liable for Capital Gains Tax when you sell a property. Instead, you will be required to pay income tax or corporation tax, dependent on how your business has been structured.
Calculation of Capital Gains Tax
As the name suggests, Capital Gains Tax is based on the net gain that you have made, rather than the amount of money you’ve received overall, e.g.
If you bought an investment property for £125,000 and sold it for £175,000 you’ll pay CGT on the sum of £50,000 (£175,000 – £125,000 = £50,000)
You are not required to pay Capital Gains Tax if the total of your gain in one year is below your tax-free allowance. However, gains above the annual exemption are charged at 18% or 28% – this depends on your other incomes.
You may be entitled to tax relief if you sell property that you use for business – this may reduce or delay the CGT you pay.
We recommend that you initially visit the Government website for more detail on the calculation of Capital Gains Tax on UK property. Alternatively, call and speak to a member of our friendly team and we can talk you through the process.
Exemption from Capital Gains Tax
In April 2023 the Capital Gains Tax annual exemption (2022/23) will be cut from its current rate. The impact of this is that property investors will have a smaller tax-free allowance in the following years:
2022/23 – tax-free gains of up to £12,300 per year
2023/24 – tax-free gains of up to £6,000 per year
2024/25 – tax-free gains of up to £3,000 per year
Using your annual Capital Gains Tax exemption is one obvious way to minimise your liability. The CGT exemption cannot be carried over from one year to the next, so it makes sense to use it each year to reduce your future liability. If you are anticipating a large gain, you can maximise the current £12,300 exemption before it is cut in the next tax year.
How to minimise Capital Gains Tax liability on property
Here are some further ways to limit your Capital Gains Tax liability when planning on disposing of a property:
- Make use of unused losses
Gains and losses made in the same tax year must be offset against each other. However, you can reduce the amount of gain that is subject to tax by bringing forward unused losses from previous years. The current stipulation is that losses must be reported to HMRC, in your tax return, within four years of the asset being disposed of.
- Transfer assets to a spouse or civil partner
Transferring assets to a spouse or civil partners enables you to use the other person’s annual tax-free allowance exemption, to potentially double the size of your exemption in any one year. Conditions apply, e.g. the transfer must be a genuine gift.
- Pension contributions
With the Capital Gains Tax rate dependent on your income tax band, it makes sense to minimise your income tax bill. Making a pension contribution could help you save on Capital Gains Tax. When deducted at source, contributions to your pension increase the upper limit of your income tax band. If your combined Capital Gain and other taxable income fall into the basic-rate income tax band, Capital Gains Tax is payable at 18% instead of 28%.
- Take out an ISA
Gains made on ISAs (Individual Savings Accounts) are Capital Gains Tax-exempt. Individuals can invest up to £20,000 in an ISA, or £40,000 in total for married couples and civil partners.
These options are provided as general methods for limiting Capital Gains Tax liabilities – they are not a ‘one-size-fits-all’ solution. However, our knowledgeable team can provide bespoke advice. We will make sure you’re maximising any available tax reliefs, allowances and exemptions so that you are confident that you are making the best plan for your assets and circumstances.
Avoid paying tax on the same asset twice
It bears repeating that tailored tax planning advice is the best way to minimise your liabilities and ensure that your financial affairs are in order.
Wherever possible, you should seek to avoid paying Capital Gains Tax on assets sold later in life, if your estate will then be subjected to Inheritance Tax. While Capital Gains Tax cannot be completely omitted, with cautious planning you can harness available reliefs and allowances to limit your bill.
For advice on how to minimise Capital Gains Tax, call us today
Capital Gains Tax can be a complex area of accounting. Without advice from an expert accountant, there’s a risk you could end up paying it unnecessarily.
If you’re looking for robust property investment tax planning , tailored to your specific circumstances, please contact us to book a free initial consultation.