David Cameron was willing to offer racing tips to radio listeners today but little comfort for savers who fear coalition government plans to raise Capital Gains Tax (CGT) in next month’s emergency budget.
While the Prime Minister said he would “listen” to concerns about what could amount to retrospective taxation on long term savings and investments, he made no promises about what will happen to CGT on June 22.
So, people with substantial gains should consider taking action before then. Here are 10 tips for owners of second homes and buy to let landlords on how to minimise CGT liabilities under the current rules.
1: Do as MPs do and ‘flip’ your home
There is no CGT to pay on profits made when you sell your home – or “main residence” – and this creates a valuable opportunity for people fortunate enough to own more than one property. As demonstrated in the MPs expenses scandal, exposed by The Daily Telegraph, large potential CGT liabilities can be avoided quite legally in this way. If it’s good enough for MPs, it’s good enough for taxpayers. You can elect which property you wish to be regarded as your primary residence, provided there is some evidence that you have lived there, however briefly, and render the previous three years’ gains tax-free.
Mike Warburton of accountants Grant Thornton said: “If you live for even a matter of weeks at any stage in your second home, this enables you to write off the last three years’ capital gains when you come to sell.
“Some of our MPs found this facility very useful and I think it is a good general principle that everyone – politicians and taxpayers – should be taxed on the same basis.
“It would be a tragedy if, as a result of MPs’ flipping, this valuable relief – which is useful to people moving home for work purposes and other reasons – is abolished.”
Beware that you must decide which will be your main residence within two years of the purchase of one of the properties you own. Having made your choice, you can then change it. But if you fail to choose – or, in the jargon ‘elect’ – the opportunity is lost.
John Whiting of the Chartered Institute of Taxation said: “It is possible to play around with elections for a bit, but you need to be careful.”
Mr Warburton added: “For example, if you had owned your home for 20 years and a holiday cottage for 18 years – then, last year, you bought a third property.
“If you hadn’t already elected in respect of the first two, there would have been nothing you could do. But buying the third property opens up opportunities. You can still elect your main home your primary residence, but provided you elect within two years of the purchase of the new property, you can change the election on all three properties again in the future.”
2. Don’t forget the ‘letting exemption’
Anyone who has let out for rent a second property which used to be their home can receive up to £40,000 of gains on that property free of CGT. Mr Whiting explained: “Not a lot of people know this but section 223 of the CGT Act which sets out the three-year exemption also contains the letting exemption.
“This is intended to help people who find themselves with two properties unintentionally – perhaps through buying before they can sell – and rather generously allows up to £40,000 gains to be taken tax-free on a property which you have let out and had at some stage been your main residence.”
No minimum period for letting is stipulated but Mr Warburton said: “Six months should do it.”
3:Keep a record of all expenses – and claim them
Your taxable capital gain is the difference between what you buy and sell the property for – but you can reduce this figure by taking account of expenses you incurred in order to achieve that profit. For example, you can add estate agents’ and solicitor’s fees to the purchase price plus stamp duty and the cost of any money spent on improvements. Make sure you keep receipts for all these items.
4. Make the most of allowances
Once you have reduced the gain as far as you can, each spouse can claim a CGT allowance currently £10,100 allowing a married couple to realise £20,200 property profits tax-free.
5. Cherish your losses
If after Many investors in the stock market have lost money in recent years – the FTSE 100 trades today around a quarter lower than its level a decade ago – and these losses could now come in handy. If you sell these shares in the same tax year and turn paper losses into real ones, these can be offset against any profit you make on property before CGT needs to be paid.
6. Take cover in tax shelters
Another reason to consider taking profits before the emergency budget on June 22 is that top rate tax relief on pensions contributions may be scrapped as the coalition government struggles to close deficits. Pensions experts, such as Colin Jelley at Skandia, calculate that taking profits now and reinvesting gains in tax shelters such as self invested personal pensions (SIPPs) could mean top rate taxpayers are 66 per cent better off than if they wait until after the emergency budget.
7. Keep it in the family
Don’t forget that everyone has a CGT allowance – including children. So it may make sense for families fortunate enough to own several homes to consider sharing legal ownership among several individual members. However, beware of letting tax considerations over-ride common sense. Anyone considering giving property to adult children, however loving, should go and see King Lear first.
8. Get a calculator
Political speculation is rising that Mr Cameron may appease critics within the Conservative party by reinstating some form of indexation to reduce CGT bills, as suggested by John Redwood MP. This would remove the illusory element of gains created by inflation over long periods of time. The bad news is that CGT indexation calculations were so complex that even many accountants were glad when they were abolished and replaced with the current flat rate tax.
9. Tax does not end at Dover
If you are one of hundreds of thousands of Britons who own property overseas but are resident in Britain for tax purposes, you are liable to CGT on any profits after a sale in exactly the same way as if the property is located here. However, you may also find yourself liable for property taxes overseas. Where these have to be paid, they can be deducted from your liability to pay HM Revenue & Customs.
10. Beware wedding bells
Unmarried couples enjoy two lots of “principal primary residence” exemptions. But those unwilling to ‘live in sin’ and who choose to formally recognise their relationship by getting married only have one between them. This may prove another CGT headache for Mr Cameron because of his party’s manifesto commitment to support marriage in the tax system.