If you own a property other than your home you could be facing a large tax bill when you come to sell. Apart from relying on your annual exemption, what further action can you take to reduce any Capital Gains Tax due.
Time to plan
The property market has been challenging for owners over the last five years or so, but values are beginning to edge up once more. This means that the time is right for some pro-active tax planning. Without taking action now, any profit you make from a sale will be subject to Capital Gains Tax (CGT) of up to 28%.
You could just sit back until the time comes to sell. As long as you don’t make any other capital gains in the same tax year, your annual exemption (currently £10,900) will reduce the amount on which you have to pay tax. But the maximum tax you’ll save, at today’s rates, would be £3,052 (£10,900 x 28%).
The next step you could take is to transfer a share in the property to your spouse before the sale.
Tip. This doesn’t trigger any CGT and doesn’t have to be done until the last minute. Therefore the proportion of the property you transfer can be tailored to fit the circumstances.
Example. Several years ago Jack, a higher rate taxpayer, bought a commercial property for £200,000. In June 2013 he accepts an offer for it of £300,000. If he sells it in his own name he’ll pay tax at 28% on £89,100 (£100,000 gain less his annual exemption), i.e. £24,948. Gill, his wife, is certain to have no income or gains for 2013/14. By transferring a 72% share of the property to her, their joint CGT bill will be reduced to £18,695.
When standard planning won’t work
While transferring a share of a property to your spouse before sale is an established way to reduce the overall CGT bill, this won’t work where they have used their annual exemption and are chargeable to the same rate of CGT as you.
Extended tax planning
If your main concern is not handing over a large chunk of the profit from a sale to HMRC and you don’t mind your children benefitting, you can instead transfer a share of the property to them to save CGT. But this arrangement works differently and requires advance planning.
Transfers between parents and their children are treated as if they were a sale at market value. Jack, from our earlier example, can use this anti-avoidance rule to reduce the overall CGT bill. He has two daughters; had he transferred a share of the property to them in 2012/13 it would have counted as a sale. He could tailor the amount transferred, probably about 5.5% to each, so that the capital gain resulting was just enough to use up his annual exemption, thus saving £3,052 CGT overall by making use of an extra year’s annual exemption.