CGT: Maximise tax relief and plan ahead

Changes arising in the 2014 Budget brought both good and bad news for property owners at the start of the year. The bad news is that changes around Private Residents Relief due to take place in April 2015 could result in thousands of extra pounds in tax for those who have a property portfolio with two or more homes. The good news is that with some additional focus on tax planning for CGT, this can be reduced or mitigated.

What is new with CGT legislation?

From April 2015, it will no longer be possible for homeowners to select which of their properties is their private residence and therefore relevant for Private Residents Relief (PRR). PRR is a valuable tax relief, essentially, making the entire gain of a property sale exempt from tax, so the planned change for next year has caused some reasons for concern among property owners. This change has come to light due to situations with wealthy MP’s who were undertaking a tax avoidance technique referred to as “flipping” whereby they frequently change which of their properties was considered their private residence, before a property was sold, to avoid paying tax on any gain. The government was therefore forced to address the problem.

Vague legislation

One of the issues with CGT, particularly linked to PRR, is the language used in legislation is considered “vague”. An example of this is that the only interpretation for the word “residence’ is that it needs to be given it’s “usual meaning”, which broadly speaking is “the dwelling which a person habitually lives, i.e. their home”. Therefore, when certain cases have been investigated the gain has been considered taxable because the opted residence was considered either, or:

1) Non-permanent

The duration of occupying the property needs to demonstrate permanence to some degree.

2) To lack continuity

There needs to be evidence that there was intention to remain in the property for some time. Following April 2015, there are expected to be a few exceptions the new rules to protect those who are not intentionally planning to avoid paying tax. This could include if you had to move home whilst your existing home sells – without some form of concession here a taxable gain could be relevant.

Maximising your CGT allowances

The good news is that the CGT allowance is one of the more generous tax reliefs including a few ways to extend the annual allowance through your spouse, your partner or your children. The 13/14 CGT allowance is £10,900, meaning this amount of a financial gain on a sale of a property is tax free. After that any gain attracts 28% tax (unless PRR is obtained). Here are a few ways to extend this CGT allowance:

Spouse:

By allocating half or some of the asset to your spouse before a sale, the gain is split and therefore both CGT allowances can be allocated, giving a total tax free gain of £21,800 (13/14)

Partner:

If you are not married, broadly the same effect can be gained but longer term planning is required. It works in the same way as for married couples, in that assets are transferred to your partner. If and when they increase in value and a gain is made, again, both CGT allowances can be utliised.

Children:

There are many tax planning rules that prevent you including your children in your plans, however, CGT is not one of them. Transferring assets (property or shares) to your children could be a sensible way to cover school or care fees in the future by allocating them with a self-sufficient way to support their education. All children, babies included have a CGT allowance, which, if you have a healthy asset portfolio and want to start a nest egg for your family, could be useful in reducing your overall tax position. Figurit have many clients with a property portfolio who we help with Capital Gains Tax questions, including ways to maximise tax relief in the short and longer term. Call today to speak with one of our experienced tax advisors: T: 020 7376 9333