Managing the Impact of Capital Gains Tax Following a Property Sale

Managing the Impact of Capital Gains Tax Following a Property Sale

Property Capital Gains Tax UK

Property Capital Gains Tax UK

Capital Gains Tax is a levy on any profit made upon the disposal of an asset. It is applicable to most assets when they are sold, inherited (and then sold), and even gifted. Where the seller would have once had up to 22 months to report and pay a capital gain following the sale of a Buy To Let/second property, they now have just 30 days.

Further to this, as Chancellor Rishi Sunak looks for ways to cover the substantial costs of the Covid-19 pandemic, it’s suggested that the amount of tax levied on capital gains could be raised by billions of pounds. If this report is to come to fruition, higher rate taxpayers - who own second homes or assets not shielded from tax - would be the ones hardest hit. The total inheritance tax receipts from HMRC data in 2019/20 is already a whopping £5,200,000,000; whilst the total capital gains tax receipts stand at an overwhelming £9,200,000,000.

The award-winning, Essex-based property developers, Granville Developments, have partnered with the capital investment experts, SidebySide, in order to provide effective tax solutions to higher rate taxpayers, following the sale of a property. James D’Mello, Head of Business Development at SidebySide, has provided his considerable insight into how an individual can defer their capital gains tax indefinitely.

In order to provide a clear and comprehensive overview of how an individual can manage the impact of capital gains tax following the sale of a property, James has put together a scenario revolving around retiree, Joseph Barnes.

Joseph Barnes has owned a total of three buy-to-let properties by the train station in Cheltenham, over the last 15 years. To avoid the difficulties of dealing with property management as he moves into his retirement, as well as the bother of inheritance tax, Joseph decides to sell all three properties. The initial cost of these three properties was £300,000. Joseph, however, is able to sell them for a grand total of £700,000 net of solicitors and fees, resulting in a combined capital gain of £400,000.

In order to defer the capital gain, Joseph is now planning to invest into a tax efficient investment fund. This will also assist in sheltering his assets from inheritance tax when he passes them onto his children. These types of investment have been around for nearly 30 years and can be a very powerful tax planning tool for people like Joseph. They are government-backed schemes that allow investors some very generous tax reliefs in exchange for investing in younger British companies.

If Joseph were to invest the value of his gain (£400,000) into qualifying shares, he could be granted the opportunity to defer his full capital gains tax bill of £112,000. Further to this - providing he has held the shares for at least 2 years - Joseph would also qualify for inheritance tax relief on his investment. Joseph’s remaining £300,000 could then be used to pay off the remaining mortgages and comfortably fund his retirement.

Depending on the amount of income tax he has paid, Joseph would also be able to claim up to £120,000 of relief against his income tax bill - on top of the capital gains and inheritance tax benefits!

Ultimately, if Joseph were to invest the full £400,000 gain, he could, not only defer £112,000 of capital gains tax (assuming 28% CGT on £400K gain), but also receive £120,000 of income tax relief (provided he has paid this much income tax) and £160,000 of inheritance tax relief (provided the shares are held for 2 years). In the event of Joseph’s death three years after making this investment, his fund value would transfer to his children, exempt from the 40% inheritance tax. Not only that, but his £112,000 of capital gains tax would expire upon his death, too. Alternatively, if Joseph were to die whilst still holding this tax efficient investment, the capital gain will essentially expire. Neither his children, nor his beneficiaries, would be liable for the original capital gains tax bill.

When deferring capital gains tax through this form of tax efficient investment, they will remain deferred up until the investment is sold. Following this, a further investment can be made in order to defer the tax again. Joseph may even be able to reduce the size of the investment needed to defer the gain, by utilising his annual capital gains tax exemption for the year in which the gain revived.

Finally, it’s definitely worth exploring Joseph’s financial situation if he were to decide not do any tax planning. Joseph would, of course, sell his three properties - making a £400,000 capital gain. He would then need to pay £112,000 in capital gains tax. This would leave him with £288,000. Following this, once the assets have been passed on, £115,200 of potential inheritance tax would be deducted. This would ultimately leave Joseph with just £172,800 - from his original £400,000 gain - to be passed onto his children.

There are many people in the same position as Joseph. The SidebySide Partnership have seen an increased number of clients who have sold properties, which they have held for many years, with a significant capital gain. With changes to the rules around the reporting and payment of capital gains tax from earlier this year, many higher-rate taxpayers have found multiple benefits in thoroughly exploring their options.