How can I cut the capital gains tax I’ll owe on the flat I’ve been renting out?
I have rented out the flat for the whole five years that I have owned it. Recently, I’ve been making mortgage overpayments to help with the loan-to-value ratio on the mortgage.
How do I go about finding out how much capital gains tax I will have to pay? And is there anything I can do to reduce my capital gains liability?
As the property has not been your main home, you may have to pay capital gains tax when you sell it. This is calculated as the difference between what you paid for your property and the proceeds of sale.
You can deduct the costs of buying, selling or improving your property from your gain.These include estate agents’ and solicitors’ fees; and costs of improvement works, but not maintenance work.
As you didn’t live in the property, there is no scope to deduct letting relief and principal private residence relief. However, you are allowed to make £11,100 a year in capital gains before you must pay tax. This, combined with deducting any capital losses arising in the year, can help reduce your bill.
If you weren’t using the money to buy another property, you could defer the gain in the property by investing in an Enterprise Investment Scheme (see below) or in Social Investment shares up to the value of the gain on your property.
Tax won’t be due for as long as the investment is held and the capital gain will be eliminated if the investment is held at death.
With SEED enterprise relief shares, 50% of the gain is relieved provided you invest an amount up to the value of the gain.
Capital gains are taxed at 18% if you are basic-rate taxpayer and 28% if you are a higher-rate taxpayer.
You may be able to use this to your advantage by deferring the completion of the sale of the property to a tax year when your income falls into the basic-rate band.
For example, if you expect to pay higher-rate tax this year and basic-rate next year, you could defer the timing to 6 April 2016 and save yourself 10% capital gains.
By deferring the gain until then, you can also defer the payment date of the capital gain by another year from 31 January 2017 to 31 January 2018.
This could be useful cash flow to finance the purchase of your house up north. In any event, you will need to complete a self-assessment tax return.
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.
Moneywise quick guide: Enterprise Investment Schemes
There’s no doubt that individual savings accounts (Isas) and pensions are tax-efficient homes for your money, but there are other investments that can keep the taxman at bay.
Enterprise Investment Schemes (EISs) are a tax-efficient way to invest in the new shares of small businesses, as well as giving much-needed capital to businesses that cannot get funding from traditional methods, such as the banks.
The scheme offers investors significant benefits. Investors who invest for a minimum period of three years benefit from 30% upfront income tax relief, up to a maximum investment of £1 million, which can be carried back to the previous tax year.
The investment grows tax-free, and there is also capital gains tax deferral for the list of the investment. Investments in EISs fall out of your estate after only two years.
But EISs are unquoted companies and not listed on a stock exchange. Investment in companies that are not listed on a stock exchange often carries a high risk and the generous tax reliefs are intended to offer some compensation for that risk.
If it’s right for you, there are several ways to invest, either in single companies, or a collective investment, such as an EIS fund.
Capital is only returned when the underlying investment is sold, so only consider the scheme if you can afford to lock money away for long periods of time. Unlike other asset classes, there is no secondary market for EISs so you will not be able to sell your investment easily.
An EIS investment is most suitable for wealthier investors who have used their annual Isa and pension allowances and who understand and are willing to accept the high risks involved.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Enterprise Investment Scheme
A scheme set up to encourage investment into small, unquoted trading companies and give investors tax breaks to compensate for taking risk. Because the companies in the scheme are not listed on a stock exchange they often carry a high risk, so the tax relief is intended to offer some compensation. An EIS company cannot be a subsidiary, must trade wholly in the UK, can’t employ more than 50 people and certain activities (including forestry, farming and hotels) preclude companies from offering EIS relief.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.