how to make the most of your capital gains

In Tax Hacks, our columnist Mike Warburton – previously a tax director with accountants Grant Thornton – brings you his best tax-saving tips

There was concern last week following the Chancellor’s announcement that he has asked the Office of Tax Simplification to review capital gains tax, including reliefs and exemptions. It is important to keep this in perspective.

The OTS was set up to examine the structure of taxes and to consider ways of simplifying the rules and improving taxpayer experience. It is not involved with issues of tax policy as such.

I served on the OTS in the days of the Coalition government and this point was made clear at our first meeting by the chairman, Michael Jack. The Government certainly needs additional tax revenue but I would be very surprised if this came through any drastic changes to CGT, such as removing the exemption on your main home.

In addition, there are sound reasons why capital gains are taxed at lower rates than income. Companies already pay corporation tax on profits so taxing share gains need to be at a lower rate to limit double taxation. It is the same reason why dividends are taxed at a lower rate.

In addition, property and share disposals will typically include inflationary gains making a lower CGT rate appropriate. Alternative systems have been tried in the past but all have suffered from increased complexity. I would also be surprised to see any suggestions taken up as soon as the autumn Budget this year.

For the time being it is probably more productive to concentrate on what we know is happening as a consequence of the temporary reduction in stamp duty on property. Increasing the threshold to £500,000 will save up to £15,000.

Estate agents and others are already reporting a jump in activity with an increase in property transactions likely between now and 31 March as buyers rush to avoid missing out on stamp duty savings and sellers take advantage of the active market being generated. 

If you are buying a property…

For buyers of second homes and investment properties a saving of up to £15,000 is a big incentive even though you will still have to pay the 3 percentage point levy.

Here is a reminder of some key tax issues for buyers to keep in mind.

  1. Remember to keep a record of all buying costs. The completion statement from you solicitor will include the cost of the property, legal costs and any stamp duty.
  2. Before the property is occupied it is common to spend on renovations or improvements. These are regarded as capital costs and can be taken into account when the property is eventually sold.
  3. Within two years of buying the additional property you should write to HMRC electing which property is to be treated as your main home. So for example, if you live in London and buy a second home in Devon, elect London as your main home. As long as you live in the Devon property as a home at some time, even for a month or so, you will be able to vary the election for this short period and obtain a CGT exemption for the last nine months of ownership.

If you are selling a property…

  • You may have to spend money preparing the property for sale. Keep a record of these costs as well as the estate agent and legal fees.
  • Before you sell, consider whether to make the election noted above for a period when you lived in the property. If two of you own it jointly you should both send elections.
  • In advance of the sale consider how you split the ownership with your spouse so that you take full advantage of the annual CGT exemption, lower-rate tax bands and any tax losses brought forward.
  • If the property was your main home or treated as such under an election you may still qualify for letting relief. This is relief for up to £40,000 of any capital gain where you have let out part of the property while continuing to live in it as your main home.
  • A further claim for relief may apply if you have taken in a lodger who has lived with you as part of the family. This relief is explained here.
  • Relief is not restricted because elderly parents come to live with you, or adult children return to the nest even if they pay for their accommodation.

Finally, this year new rules apply for paying CGT on residential property sales. We now have just 30 days from the completion date to both report the disposal to HMRC and pay any tax due. Guidance is available here and the reporting can be made online if you have your Government Gateway user ID and password.

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