CGT and Property: How to Save on Hefty CGT bills

Undeclared Property Income

Are you looking to make a profit from the sale of one of your properties? If so, you are more than likely going to be subject to Capital Gains Tax (CGT). Here are just some of the ways you may be able to reduce this tax burden…

What is Capital Gains Tax?
Whenever an individual sells a property for more than they initially paid for it, they make a ‘Capital Gain’ (profit). If this property in question is not the home of the individual, then tax of up to 28% (18% for the lower tax payer) is applied to this ‘Capital Gain’ made from the sale.

CGT Allowances
You will only ever have to pay CGT when your overall gain exceeds your tax-free allowance. In the 2015/2016 tax year, your tax free allowance is set at £11,100. However, there are several ways you can reduce your CGT bill significantly once you have exceeded this allowance:

If the Property is your Home
One of the most common ways to reduce your CGT bill is by making the property your home. CGT will not apply if:

  • You have lived in the property for the duration that you have owned it
  • You have not let part of the property out to more than one lodger
  • The property is less than 5,000 square metres
  • The property was not bought to make a gain

This is known as a Private Residence Relief and exempts you from CGT. However, if you do not meet all of these qualities you may still be eligible for a partial relief. This may be applicable where part of your property is used for business purposes, you have not always lived in the home and/or you owned more than one property. To find out if you qualify, read more here.

Furnished Holiday Lets
Living in a property you own is not always a plausible option. If your property is for letting purposes, you can consider the option of a Furnished Holiday Let (FHL) to save on CGT. A FHL is a property that is rented out for public use and must satisfy these conditions:

  • Commercially let as holiday accommodation for at least 105 days
  • Available for commercial letting as holiday accommodation for at least 210 days
  • Not let for periods of more than 155 consecutive days

FHL’s qualify for two reliefs: CGT Rollover Relief and Entrepreneurs ReliefCGT Rollover Relief allows for the owner to ‘roll over’ the gain made from the sale of a property towards the purchase of a replacement property. In effect, tax will be deferred. (It is important to remember that the tax deferred will be calculated on the time period that the property was a FHL.)

Alternatively, Entrepreneur’s Relief can be claimed on the whole gain of the property and in addition to (or instead of) CGT roll over relief. The relief means that you will pay tax at 10% on up to £10 million on the property you are selling, as opposed to 28%. In essence, by renting your property for short periods each year, you can defer a proportion of your taxable gain to another property you have recently bought and pay 10% tax on the remaining bill.
It is advised that you seek advice on the entrepreneur’s relief and CGT rollover relief to see if you qualify.
If you would like further information on the capital gains tax, please contact paul.dell@raffingers-stuart.co.uk for more information.