As the name Capital Gains Tax suggests, it is a tax on Capital Gains (depending on the investment, you will be taxed while buying or selling property). Capital is wealth in the form of money or property used to make more wealth, and gain increases the value of that wealth. CGT was first introduced in the UK in 1965, and a CGT liability may arise when a chargeable person makes chargeable disposal of a chargeable asset. In short, you become chargeable to CGT either you are an individual who is a tax resident in the UK, or you are the personal representative of a deceased person1. UK government is thinking on getting as much money into their coffers as quickly as possible due to the massive spending in the wake of the Pandemic2. You are probably wondering; how can I avoid Capital Gains Tax on the property3?
“You become chargeable to CGT either you are an individual who is a tax resident in the UK, or you are the personal representative of a deceased person.”
This article lay out 10 Strategies you can follow to avoid Capital Gains Tax on your property. You can send us a message or book an appointment with us to assist you on this matter.
If you are looking for ways to avoid your CGT, follow the given tips:
1. Use CGT allowance
Every individual has an annual CGT allowance of up to £12,300, allowing you to make an investment of the allowance amount (£12,300) free of any tax. If not used, the allowance cannot be carried forward into the next tax year, so it is prudent to use this tax-free allowance each year to minimize the risk of sustaining a significant CGT bill in the following years.
2. Offset losses against gains
Disposing assets at a loss can be a robust and calculated move when cutting your CGT bill. Unlike the Capital Gains Tax allowance, you can cart losses onward to balance against gains made in future years. Suppose you are preparing to sell an asset attracting a significant CGT bill.
In that case, you may also want to consider setting other assets that are not as valuable as they were once, such as meagre-performing investment stocks and shares. The loss made on this removal can then be used to offset against the CGT bill ascending from the more lucrative disposal.
3. Gift assets to your spouse
Capital Gains Tax is exempted on the transfers between spouses, which means that property can be transferred between the spouses or civil partners to use both annual CGT allowances which is £24,600. It effectively doubles the CGT allowance for married couples and civil partners. The transfer must be an unpretentious, absolute gift.
4. Reduce taxable income
The rate of CGT is charged grounded on the rate of paid Income Tax. Consequently, lowering taxable profits in any one year could reduce the CGT rate from 10% to 20% or 18% to 28% if you sell residential property. Reducing taxable income can be done in several ways: waiting for retirement and an alteration from remunerations to pension income; salary sacrifice through pension contributions or childcare checks; complying with the State Pension or reassigning taxable income bearing possessions such as cash deposits to a spouse earning lower than the other one.
5. Buying and selling within the family
Can also be referred as bed your spouse, which might sound odd, but the notion is simple. Initially, it curtails ‘bed and breakfasting’, which means to sell property only to repurchase it on the same day. The purpose for doing this is that when the property goes up in value, you dispose it off and utilize your CGT exception to cover any gain. You repurchase it because it is likely to increase in value.
“By bed your spouse rule, the valuable possessions can be kept within the family while still minimizing any CGT.”
When you sell it in the future, the gain will be calculated between the repurchased values instead of the original value when it was first purchased. This practice has been obliterated by a thirty-day rule that directs, thirty days should pass before you can repurchase similar shares. Nevertheless, a genuine ambiguity around this is selling the property and getting your husband or wife or a civil partner to buy the same property.
In this way, the valuable possessions can be kept within the family while still minimizing any CGT when it comes to future disposal.
6. Contribute to a pension
The most effective way of reducing Capital Gains Tax for higher taxpayers is by paying into a pension fund. It is because, when you pay into a pension fund, you receive tax relief from the government by way of spreading your basic rate income tax band. If you put £3,000 into your pension and your annual salary is £65,000, you only need to pay 40% income tax on £6,000 of your earnings instead of £7,000 (excluding your personal allowance, you have to pay 20% income tax).
The further you prolong your basic rate income tax band, the possibility for CGT to fall into the lower rates will increase. If you are not sure how this works, see our article on capital gains tax which explains how much CGT you pay.
7. Make charity donations
“Donating to Charities increases your basic rate income tax band and allows more CGT to drop into the lower rates.”
Contributing to charities helps lessen your CGT in a similar way to paying into a pension fund. However, there are caps when it comes to giving in to a pension endowment, either the equal of your annual salary or £40,000 (whichever is lower). If you have exploited this opportunity already, you may want to consider donating assets or cash to a charity. It again increases your basic rate income tax band and allows more CGT to drop into the lower rates.
8. Spread gains over Tax years
9. Availing ISA allowance
Around 19 million in the UK use Individual Savings Account (ISA) a tax shelter to retain income and capital gains from the taxman’s grasp. Gains made inside an ISA are free from CGT, so an ISA is one of the best defenses against paying unnecessary tax. Safe from HM Revenue and Customs (HMRC) hands, many investors have made six figures sum inside ISA for many years. Like the bed and spouse alternative, ISA involves selling assets to realize a capital gain and then instantly purchase back the same possessions inside an ISA. It allows all future gains on the possessions to be free of Capital Gains Tax.
10. Invest in small companies
Willing to take a risk? By investing in special tax-efficient programs which provide funding to small businesses, you can reclaim some, if not all, of the Income Tax and CGT you have already paid. These schemes are known as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) and are usually full of risks, so they are best left to professional investors. It is imperative to talk to an experienced advisor before even considering these schemes. If you want to delve into this strategy, Legend Financial has a team of experts that can guide you along the way.
CGT is the difference between the amount you paid for the property and for the amount you sell it. The difference being produced is the gain.
Usually, a charge to Capital Gains Tax arises after selling a property, but it can also occur in the following cases:
- Give away a chargeable asset.
- Transfer a chargeable asset to another person.
- Exchange a chargeable asset for something else.
- Receive reimbursement for the loss or destruction of an asset-for example, an insurance payout.
Tips to avoid CGT on a Property Sale
Regardless of what personal assets you plan to sell, there are some strategies you can use to minimize the capital gains tax for which you are liable. The UK outlines a few circumstances that make evading capital gains tax on a property sale possible. It is mainly the case when a local sell his/her home5.
The person residing must meet all criteria to avoid the capital gains tax on a property sale. Firstly, the house that the resident is selling should be the primary residence6. It needs to be the only property that the owner has. Property holders must prove that they did not buy the property only to make a gain.
For those who have breathed in the unit for years to declare it as their primary residence, this should not be a problem. However, this factor could become knotty for those who flip homes. If you buy a home as a fixer-upper or an asset, you will likely have to pay CGT upon sale.
Have you heard of Private Residence Relief?
NO Capital Gains Tax has to be paid when you sell (dispose of) your home if all of the following apply7:
- Have one house and have been living in it as your main home for all the time you have owned it
- You have not let a portion of it out. This does not exclude having a tenant
- Part of your home has not been used solely for commercial purposes (using a room as a temporary office does not count as commercial use)
- The whole building is less than 5,000 square feet
- It was not bought just for earning gain.
Tips to avoid CGT on Inherited Property
Parents and Grandparents gifting property to their children have become common. If inherited property is the primary residence, then Capital Gains Tax will be exempted. If you do not want to sell your property to avoid capital gains tax after you die, IHT will be implied (40% of your gained profit). HMRC allows the sale of inherited property without paying Capital Gains Tax but with some rules and regulations.
If you stand to inherit property and you want to avoid paying taxes on it, there are possible options for minimizing capital gains tax altogether.
“By selling the inherited property right away, you’re not leaving any room for the property to appreciate any further.”
The first is to sell the property as soon as you have inherited it. By selling it right away, you are not leaving any room for the property to appreciate any further. So, if you inherit your parents’ home worth £200,000, selling it right away could help you avoid capital gains tax if it still worth’s £200,000 at the time of the sale.
Another possible option is not to sell the property and rent it out instead of living in it. However, this can be a little tricky since there are still tax rules you have to observe. An inherited home treated as an investment property for tax purposes would still be subject to capital gains tax if you decide to sell it.
Tips to avoid CGT on Overseas Property
The most common question asked is, What should be done to avoid Capital Gains Tax on the property? This question comes with a straightforward answer given below.
The occupant must affirm to the government that the foreign home will serve only as the primary residence. Normally, property holders should make this declaration within two years of buying foreign goods. The only way this would be problematic was if the UK resident definite of selling his foreign and UK property in the same year. And, if you want to evade CGT on your foreign assets, you must keep this in mind.
- UK government does not need CGT if the property is available to everyone as their primary residence.
- If UK residents declare a global home as their primary residence, it is possible to avoid taxes on foreign goods.
So, residents should declare to the UK government that a foreign home can function as a primary residence. Usually, owners should claim their foreign property as primary residence within two years of purchasing the foreign property. CGT will only be charged if you try to sell your foreign property within one year.
Capital Gains Tax is not a concern that only shakes the wealthy. Average taxpayers can save thousands of pounds on CGT by using a few of the mentioned tactics. If you are concerned regarding How to avoid Capital Gains Tax on the property, just remember that you need not to pay CGT on the primary residence because the UK government allows you to do so.