With the Buy-to-Let market booming, many people will dispose of a rental property in their lifetime. This article explores some of the factors which can affect the tax position on such a sale:
The simplest way of reducing a capital gain is to ensure all costs of acquisition and sale are claimed together with any capital improvements. Capital improvements encompass a wide range of expenditure but all costs not already deducted against rental income should be reviewed.
Main residence and Lettings Relief
If the property has ever been used as a main residence by the vendor, Principal Private Residence (PPR) relief should be available to exempt part of the gain from Capital Gains Tax (CGT). This relief is available to individuals and certain trusts.
Less widely known is “Lettings Relief” which further exempts up to £40,000 of an individual’s gain if a property (which has been their main residence for any length of time) has been let. Property held jointly between spouses can benefit from two sets of Lettings Relief.
Non UK residence
Non UK residents have only been in the scope of UK tax on the sale of residential property since April 2015. They are subject to Non Resident Capital Gains Tax (NRCGT) and there are three main differences from CGT:
- Only the gain arising post April 2015 is chargeable.
- If the property is held in a non UK company, the company rate of NRCGT is 20% and therefore greater than the current corporation tax rate.
- A NRCGT return must be filed within 30 days of the sale. The tax must also be paid by this date unless a Self-Assessment tax return will be filed in which case the due date is the usual tax return filing deadline.
Care should be taken should an individual sell a property during a period of non UK residence which lasts less than 5 years because any pre-April 2015 gain will become chargeable on their return to the UK.
The impact of ATED
For companies holding residential properties which have paid the ATED charge the gain calculations can be particularly complicated. The gain relating to the ATED period will be subject to ATED related CGT (at 28%) and a separate return filed. The remainder of the gain will be subject to corporation tax or NRCGT as appropriate.
Where the property was purchased with the sole or main purpose to make a profit it is possible for the gain to be subject to income tax rates. This is most relevant to developers but can occur, for example, where the sale takes places shortly after purchase. New legislation came into effect in April 2016 to close a loophole for offshore companies developing land but this should affect a limited number of taxpayers.
If you are considering disposing of a UK rental property and would like to discuss this in greater detail please, contact Lynsey Lord or your usual Mercer & Hole contact.