Barrie asks: “I’ve rented out a property for 20 years and it has never been my main residence. I now wish to sell it and purchase another property to rent out. How do I minimse my capital gains tax bill?”
Question 13 – How Do I Minimise My Capital Gains Tax Bill? – Shownotes
This week’s question comes from Barrie, who left a comment on our article entitled “How To Avoid Capital Gains Tax On Property in the UK”:
I have rented out a property for 20 years and it has never been my main residence. I now wish to sell it and purchase another property to rent out. The original property (small flat) has increased in value over the 20 years. The property I want buy costs more, how do I stand regarding CGT?
Right then Barrie – we’ve got some calculations to do. I got back in touch with Barrie to get a little more information to help with this answer. He tells me the property was bought in 1994 for £30k and he is looking to sell for £110k. He adds that there has been considerable expenditure over the years to improve it – this will play a factor in the answer.
Finally, he adds that he has a civil partnership and that he is a basic rate tax payer.
Capital Gains Tax Bill Calculation
Right, let’s get cracking. Firstly, Barrie mentions that he’s buying a new property after selling this one which he plans to rent out. Unfortunately Barrie, this is irrelevant for the capital gains tax that might be due when you sell this current rental property.
Barrie has also never lived in the property, and so Private Residents Relief will not be applicable.
If you were to sell the property this year, the capital gains tax calculation would be as follows:
Disposal Proceeds = £110,000
Less: Purchase Price = £30,000 –
Less: Annual Exempt Amount (Barrie) = £11,100 –
Less: Annual Exempt Amount (Barrie’s Civil Partner) = £11,100 –
Base Taxable Amount = £57,800
However, this isn’t it. You can also take “other costs” off this amount. This includes all costs related to acquiring or selling the property. This will include legal expenses, estate agent fees and any other related costs.
Additionally, you can include the costs of improving your property. These need to be costs of improvement to the property, rather than regular maintenance. Therefore, any costs related to adding a conservatory to the property could be deducted, but decorating the kitchen could not. There is a fine line between these two, but generally if the cost is related to something that improves and adds value to your property on a one-off basis will be deductible.
So, after those costs, your taxable amount may reduce to a lower amount. If we assume that this is around £50,000, then your capital gains tax bill would be 18% of that amount as you are a basic rate taxpayer which would be £9,000.
So, on a gain of £80,000 (sales price of £110k vs purchase price of £30k) then you’ll have to pay £9,000 of capital gains tax in this example.
Capital Gains Tax Bill Relief
There are some other exemptions that it is worth knowing about, but which Barrie isn’t currently eligible for.
Firstly, for people who have lived in the property themselves can claim PRR – Private Residence Relief. You need to meet the following criteria:
- you have one home and you’ve lived in it as your main home for all the time you’ve owned it
- you haven’t let part of it out – this doesn’t include having a single lodger
- you haven’t used part of it for business only
- the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
- you didn’t buy it just to make a gain
So, in your current position Barrie, you wouldn’t be eligible for this relief. Some might suggest moving into the property now and nominating it as your primary residence, but you’ll still struggle to prove the two criteria that you only had one home and you lived in it as your main home AND that you didn’t just buy the property to make a gain.
However, it’s worth thinking about this when trying to plan your tax strategy for future properties.
There is also a further relief called “letting relief” (which can give you up to £40,000 further allowance on your capital gains) but this is only allowable where PPR has already been proven to be allowable. Again, this won’t help you Barrie. Sorry.
Conclusion – How Do I Minimise My Capital Gains Tax Bill?
So, for me, that’s as far as I can reduce your capital gains on this property Barrie. Disposal proceeds minus acquisition costs minus other costs of buying, selling and improving the property, less the annual exempt amount for you and your civil partner, will give you your sales price. However, I would recommend that you speak to an independent tax advisor as they may be able to help you further for your exact situation.
This maybe isn’t the result you wanted Barrie, but as I concluded on the longer article which is linked in the shownotes, if you’re paying tax, it’s because you’ve done well on your investment. Ignoring your rental profits, in 20 years, a £30,000 property increasing to £110,000 is an equivalent of a 6.7% annual gain. When taking the estimated £9,000 tax off that calculation, it’s still an annual gain of 6.3%.
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