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Rental Properties and Capital Gains

Summary of Key Points

  • There are three rates of Capital Gains Tax – 10%, 18% and 28%.
  • A Furnished Holiday Let is taxed at the 10% rate.
  • If your taxable income plus gains in the tax year is above £45,000 you’ll be taxed at 28%.
  • Each UK resident has an annual CGT exempt band of £11,300.
  • It’s the net of all your gains and losses on disposals in the tax year which counts as your “gains”.
  • There are various tax reliefs available if your rental property has ever been your main home.
  • If you sell any asset at a loss, make sure you put this on your tax return!
  • Keep records of all the costs you incur!

Background

The big bull market in property between 1996 and 2007 means that more people than ever in the UK own more than one property.  This note sets out the main rules when you come to sell – and what you could do to reduce your tax bill.

Three Possible Rates

  • If you have a Furnished Holiday Let (FHL) the tax rate is 10%. 
  • If your taxable income for the tax year, plus the total of all of your gains and losses, exceeds £45,000 then your tax rate is 28%.
  • Everyone else has a tax rate of 18%.

Your Taxable Gain on an Asset

Your calculation is as follows on any asset:

  • Disposal Proceeds                                MINUS
  • Selling Costs                                       MINUS
  • Refurbishment Costs                           MINUS
  • Purchase Cost                                     MINUS
  • Buying Costs

If you were able to claim costs against income as repairs and maintenance, you can’t claim them again as refurbishment costs.  If you can’t support the costs with invoices, you clearly have a risk that an inspection or enquiry will end up disallowing them.

Date of Disposal

If your disposal is near the end of the tax year on 5 April, or near a change in the rules on a Budget – take care!

The disposal date is the date when the property has passed without any conditions attached.  It sometimes happens that houses are sold subject to certain conditions – such as being free of tenants, for example.  So if a contract signed on 15 March “subject to free possession” and the tenants leave on 28 April, the disposal date is 28 April.  So you are now in a new tax year and if you’ve missed this point it could be costly!

All Gains and Losses

It’s the grand total of all gains and losses that counts.  So if you are selling your rental property for a potentially big gain, now could be the ideal time to sell those RBS shares you bought at £6 in the boom times!  Note that if you do sell an asset at a loss, put it on your tax return – you can carry this forward for ever against any future gains.

Exemptions

If you have lived in the property as your main residence for some period, you can get partial Principal Private Residence Relief  (PPR) and Letting Relief.  The rules on these are quite complex but it’s not unusual for them to totally wipe out even a potentially large tax bill.

You can only claim one property at a time as your PPR and you can expect to have to produce evidence that the given property really was your residence.  For example, if all your letters from HMRC in the given period were still going to another address this is not a good start!

Spouses and Partners

Every UK individual has an allowance of £11,300 per tax year against Capital Gains Tax.  If you don’t use it in any one tax year it does not carry on to future years.  If you own a property jointly then each of you gets taxed on 50% of the overall gain.

Tax law accepts that “partners” can have different PPRs so it can make sense for each partner to elect a different property as their PPR providing there is some support for this.  This is one time when it’s better not to be married as HMRC will not accept a husband and wife electing two separate properties as their PPRs at the same time.

Paying the Tax

The payment date is on the 31 January following the end of the tax year of disposal.  If your disposal date is 5 April 2017, your tax is due on 31 January 2018.  But if the disposal date is 6 April 2017, this is in a new tax year so payment is due on 31 January 2019.