Craig Hughes – Personal Tax Specialist
Many buy-to-let property investors have had issues with the introduction of unfavourable tax policies in the last couple of years. With potential future increases to capital gains tax, investors may be contemplating selling up. But what aspects should be considered beforehand?
By way of a recap, investors who bought into the buy-to-let property market now face a constraint on the tax relief of interest payments, the removal of wear and tear relief and the addition of further 3% stamp duty fees for purchases of additional properties. From 6 April 2020, the highly valuable, principal private residence (PPR) relief was also restricted and letting relief was all but abolished, only now applying in very specific circumstances.
For B2L landlords who are considering selling up, a catalogue of considerations follows:
Is your pre-sale tax reserve for the rental income sufficient?
Even if one investor decides to sell, given the various changes, especially the conditions of mortgage interest relief, it is critical that landlords appropriate satisfactory funds to cover the tax owing from the rental profits made prior to a sale.
Can you sell before 6 April 2022?
With the covid-19 support measures put in place by the government we would not be surprised to see tax increases going forward. Capital Gains Tax (CGT) is viewed as a cost that the ‘wealthier’ can bear, and with reports indicating that CGT rates could be aligned with income tax rates, this could see capital tax rates rising to 40%, or 45%, in certain cases. It may therefore be worth accelerating the sale of your property to avoid potentially large tax liabilities.
Have you done your calculations, and do you know your deadlines?
Landlords need to consider the sum of tax they need to account for and pay after completion of sale. A responsible CGT reserve should be put aside to cover the tax due. Under new legislation, HMRC now require residential disposals, for which a taxable gain arises, to be reported, and the CGT paid, within just 30 days of completion of sale. An individual will not want to miss any tax deadlines as the penalty charges can quickly add up.
Have you ever lived in the property as your main residence?
For those individuals who are renting out a property which they have previously `lived in, PPR relief is available to exempt the proportion of the gain that relates to the period in which an individual occupied the property as their main residence. It must be noted that a married couple, or civil partnership, may only have one, joint, main residence between them, at any given time.
Have you considered joint ownership prior to selling?
If you are married, or in a civil partnership, a viable tax planning method to consider is putting your properties into a joint ownership agreement. An exchange of a gift of property to your partner will have no tax attached to it. Another benefit is that with joint ownership you will effectively double up on your annual exemption, currently £12,300, which can be deducted against your sale proceeds prior to calculating the CGT due on disposal. It is critical to remember that the exchange of a gift must be genuine, so that your spouse will be permitted to half of the sales proceeds.
What about gifting a property to the next generation?
Rather than put a property on the market, some B2L landlords may contemplate gifting it to their child or grandchild instead. It will allow them to gain access to the property ladder and provides a future income stream. CGT would arise on the gift, but the recipient can escape paying SDLT if there is no outstanding mortgage. A gift of property, that gives rise to a CGT liability would again need to be reported, and the tax paid, within 30 days of completion of the gift.
Could you place your portfolio in a trust?
A trust can still be a sensible vehicle for holding your rental properties under the right circumstances. You should be aware of the possible CGT and inheritance tax implications. This is a complex area of taxation and professional tax advice should be sought.
Where does the debt sit?
Make sure any mortgage you take out is against your rental property and not against your own home. As obvious as this sounds, we still come across landlords who are unable to claim interest relief simply because they mortgaged the property on their own home.