Investors have the option of purchasing property as an individual or via an investment vehicle, such as through a company. Different taxes apply at different stages of owning a property — when you buy it, whilst you own it, and when you dispose of it.
In Part 1, we covered the taxes that are applicable at the purchase stage of the investment. Part 2 covered the next stage of investment, ie when you have already taken possession of the property. Here in Part 3, we talk about what entails when you dispose of your UK property.
Capital Gains Tax (CGT)
When you sell your home, you may need to pay Capital Gains Tax (CGT) on any gains you make when you dispose of your property.
CGT is currently only applicable to residential property. Commercial property such as student property and care homes will be subject to CGT from April 2019.
Your taxable gain is the difference in price between the purchase and sale of your property, after taking away any allowable expenses and your personal allowance (if selling as an individual).
SELLING AS AN INDIVIDUAL
All non-UK residents get an annual personal allowance of £11,700 for CGT.
Allowable expenses include the stamp duty paid upon the purchase of the property, agent fees and legal fees incurred during the purchase or sale, and payments for valuations made on the property.
CGT is taxed at 18% if your taxable gain is £46,350 or less, or 28% if more:
Jason sold his apartment for £275,000. He had previously bought it for £200,000, giving him a total cash gain of £75,000.
Jason must report the sale to HMRC, complete a full CGT computation and pay any CGT within 30 days of transfer.
Jason’s expenses come up to £30,400, and after deducting his personal allowance, he has a total taxable gain of £32,900.
Jason’s taxable gain is less than £46,350, so his CGT rate is 18%, and this will come up to a tax of £5,922, or 2.15% of the apartment’s sale price.
SELLING THROUGH A COMPANY
Leaving your property to your heirs
If you are leaving your house to your heirs, you may want to take note of the taxes involved in bequeathing it.
Inheritance Tax will need to be paid on any UK assets you pass on. Currently the tax is at 40% for any amount above £325,000 per individual (what is called the ‘nil-band’ allowance).
Andrew owns a house worth £350,000, which is his only UK asset. He leaves the house to his son.
The house’s value exceeds the allowance threshold by £25,000, and the Inheritance Tax on that amount would be £10,000.
The tax is paid by Andrew’s son who inherits the house.
You can put estate-planning in place to significantly reduce the tax your heirs will need to pay.
This could be something simple like bringing on a spouse or re-mortgaging your house.
Spouses can inherit their partner’s allowance, effectively doubling their tax-free allowance to £650,000.
Barry owns a house worth £500,000, which is his only UK asset. He leaves the house to his wife.
There is no IHT for passing on the house to a spouse, so Barry’s wife will not pay any tax. However, Barry’s wife also inherits Barry’s allowance.
When Barry’s wife dies, the son inherits the house. Barry and his wife’s joint allowance is £650,000, which is more than the value of the house, and the son will not need to pay any IHT.
An outstanding mortgage can also be tax-deductible against your estate, and will lower the amount of Inheritance Tax charged.
Here are some other ways of estate planning:
- Using a trust
- Using a UK company
- Taking out a life assurance policy not based in the UK
A good tax planner will advise you on your best options, ensuring that your heirs will get the maximum benefit out of what you leave to them.
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Disclaimer: This article serves as a guide to investors. Kindly note that CSI Prop is not a licensed tax advisor. Accordingly, you should seek advice based on your particular circumstances from independent advisors and planners.
By Ian Choong
- Adams & Moore Ltd
- Featured image: YourNewHouse.co.uk