Saving tax on property sales
As the capital gains tax rate has increased on the sale of residential property, it can be difficult saving tax on property sales - especially if you’re a buy to let landlord or second home owner.
Given residential property is in the spotlight, are there any methods of saving tax on property sales that aren’t likely to get HMRC agitated?
Saving tax on property sales – transferring an interest to your spouse or civil partner
Because transfers between spouses are exempt from capital gains tax (‘CGT’), it’s possible to transfer a share in your property to your spouse shortly before a sale. The potential CGT saving in this case can be over £2,000.
Whilst this type of transfer is CGT exempt, you need to be wary of the potential Stamp Duty Land Tax (‘SDLT’) charge - especially as there is now a higher rate charged on the sale of second properties.
Whilst the CGT exemption referred to above is automatic, there is no similar relief from Stamp Duty Land Tax (‘SDLT’) on an inter-spousal property transfer.
Because SDLT is based on ‘consideration’ (effectively the sum paid for the property), you can potentially transfer a property to a spouse, or anyone else, with no SDLT being charged.
Diana owns a flat worth £325,000 with no outstanding mortgage. She decides to gift a half share worth £162,500 to her husband Steve. If Steve had paid Diana £162,500 he would have been liable to SDLT at 5% - £8,125. However, because this is a gift with no consideration involved, no SDLT is payable.
Any couples thinking of transferring properties to each other should remember that consideration includes:
- Cash payments
- Any assumption of liability to pay a mortgage
In other words, even if no money is paid for the property, SDLT may still be due if the property is mortgaged and the new owner assumes responsibility for it.
Remember the stamp duty land tax is paid by the person who assumes responsibility for the mortgage. In other words the transferee.
David owns a property worth £450,000 which has a mortgage of £310,000 on it. He transfers a 50% interest to his wife, Natasha, who assumes liability for the mortgage jointly with David. He does not charge Natasha any additional consideration.
For SDLT purposes, the consideration for the transfer of the 50% share is £155,000 which is 50% of the outstanding mortgage. Therefore, Natasha must pay SDLT of £7,750 – 5% of £155,000.
Therefore. where you are looking to transfer a property interest to your spouse (or civil partner) in order to avoid income tax or CGT, you’ll need to consider the mortgage attached to the property. In some cases it may be worthwhile reducing an outstanding mortgage before transferring a property.
Saving tax on property sales – EIS deferral
As the lowest CGT rate achievable on a transfer between spouses of a residential property is still 18% you may want to consider a more tax efficient approach. You could use the Enterprise Investment Scheme (EIS) to achieve the same CGT rates for other gains – 10% and 20%.
The principles are relatively straight-forward. You invest the chargeable proportion of the capital gain made from your residential property sale into an EIS investment. This defers the capital gain until such time as you sell the EIS investment.
Chris sells his second home for £325,000 making a capital gain of £100,000. He is facing a CGT liability of £24,836 (£100,000 less £11,300 annual exemption = £88,700 at 28%). Four months after selling this property (and within the time limit) Chris defers the gain by investing £88,700 in an EIS.
Eighteen months later he sells the investment and the deferred gain becomes taxable. Chris can claim an annual exemption of £11,300 reducing the taxable gain to £77,400. His CGT rate is 20% giving a tax bill of £15,480. This results in an overall CGT saving of £9,356 (£24,836 less £15,480).
However, there are also practical issues to consider - for example:
- EIS companies are unregulated financial investments and invariably carry a much higher risk profile
- Their availability can be limited
- They can be difficult to sell
If you’re willing to take the risk there are ways to reduce this by spreading the investment over several companies (in fact some investment brokers offer EIS portfolios).
Alternatively, if you’re prepared to sit tight for at least three years on your investment, you can also potentially reduce your monetary risk further by additionally obtaining income tax relief on your investment.
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