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Buy-to-Let Property and Capital Gains Tax: An Overview

Buy-to-Let Property and Capital Gains Tax: An Overview

Among the daily obligations UK landlords have, receiving rent, ensuring that legal requirements are being met, responding to maintenance requests from tenants as well as paying their own bills, they await the ways in which the Commissioners will govern the tax regulations in the future. There was a significant change in the reporting of capital gains tax (CGT) on the sale of property that took place on 6 April. Any gains made following the sale of a property must be disclosed, and the CGT must be paid within 30 days. The 30-day deadline for reporting and payment had then been extended to 60 days as of October 27, 2021. Unlike 2019, where the taxes were payable by 31 January after the tax year ended - for example, if a property was sold in its current tax year ending 5 April 2020, any CGT is payable by 31 January 2021. There is no sense of static in these buy-to-let tax rules, which would serve as a reminder of how much they have evolved since their beginnings. As a result of the proliferation of real estate values following World War II, Labour Chancellor James Callaghan introduced the Capital Gains Tax (CGT) in 1965, which is thought to have been the main motivation behind its introduction.


What is the UK's capital gains tax rate? After nearly 60 years, capital gains tax continues to grow and intertwine in regulatory forms. Based on a graph published by D. Clarke from Statista, revenues from capital gains tax in the United Kingdom will amount to approximately 14.9 billion British pounds in 2021/22. This represents an increase of approximately 3.7 billion pounds over the previous year. You are probably at varying levels of your real estate portfolio as you read this article, whether you are a potential investor or a professional investor. The government is increasing the revenue margins by capping off more profitable amounts in property as life after covid begins to normalise. A question that arises next is whether an investor can avoid this to some degree, if at all. Whether you are an experienced investor, who owns more than one property and continues to pursue ways to improve your financial future, or you are just beginning your venture, figuring out your niche and the markets you wish to serve, this information is crucial for anyone who may one day own property. We will discuss in more detail what CGT is and what you can do to avoid having to pay sufficient CGT taxes.

What is Capital Gains Tax?

The Capital Gains Tax is levied on the profit derived from selling (or disposing of) an asset whose value has increased. If, for example, you bought a ring for £3,000 and later sold it for £15,000, you would have made a gain of £12,000. Among the ways in which an asset is disposed of are to sell, give away as a gift or transfer to another individual, swap in exchange for something else, or receive compensation for it, such as from an insurance company in the event that it has been lost or destroyed. The only time you need to pay capital gains tax is when you sell a buy-to-let property or second home. Selling your primary residence will not result in CGT.

How much is Capital Gains Tax in the UK?

The tax rate in previous years, such as 2008, was 18% with some exceptions for new entrepreneurs as well as indexation allowance and taper relief, which are now no longer available. Since then, these rates have fluctuated more than once. According to Danielle Richardson from which?, the tax rates for the 21-22 and 22-23 are 18% capital gains tax (CGT) for basic-rate taxpayers or 28% if you pay a higher tax rate. A basic-rate taxpayer is charged 10% on gains from the sale of other assets, and a higher-rate taxpayer is charged 20% on such gains. Note that these rates will only apply to gains that exceed your capital gains allowance.

How do I avoid capital gains tax on a buy-to-let property?

While we all wish the answer to this question could be as simple as pie, the fact remains that there is no one size fits all solution to avoiding taxes entirely depending on your financial status. However, there are ways in which you can reduce the amount of CGT you are charged. Below are just some of the ways you can look to reduce the fees.

Invest in a pension plan

In the case of high taxpayers, investing in a pension fund provides the most effective method of reducing Capital Gains Tax. The reason is that when you contribute to a pension fund, the government provides you with tax relief by spreading your basic rate income tax band across a larger number of years, resulting in a tax-free portion of 25%. A tax relief scheme entails the process of transferring funds that you would have otherwise paid in tax to your pension fund rather than to the government. There is usually a quarter of the pot taken as a lump sum, but it is also possible to take smaller lump sums with 25% tax-free on each one.

Report your losses

You can claim up to four years after disposing of the asset and include it in your tax return so that it is deducted from the gains you made that year. Losses from previous tax years can be deducted if your taxable gain is still above the tax-free allowance. The remaining losses can as well be carried forward to a future tax year if your gain is reduced to the tax-free allowance. Taking this route has also proven to significantly reduce your CGT.

Obtaining an ISA allowance

While it goes without saying, this option is not always the most practical option in the UK. This is primarily due to the financial strain it can bring if you are not financially flexible. Finder's Matthew Boyle found that 41% of Brits do not have sufficient savings to live without an income for a month. If, however, you become financially able to do so, stocks and shares held in an ISA are tax-free and will not impact your dividend allowance. You are also exempt from capital gains tax if you sell investments in your stocks and shares ISA.

Conclusions

Since capital gains tax (CGT) has historically been a significant component of the UK economy, it is important to understand the obligations that must be met in order for your property to be handled properly. Otherwise, paying capital gains tax can be a nightmare, and you risk paying hefty fines. It is therefore a subject matter worth further exploration, as well as a reminder that the property market is not for the faint hearted, and should not be treated as a get rich quick scheme, since you are more likely to yield results over time and not immediately. You may be well on your way to a hassle-free experience when selling property if you fall within the applicable tax relief category and/or by following some of the steps above. However, tax treatment depends on the individual circumstances of each investor and may change in the future. Please note that the information is provided solely as an example of what has been a successful investment strategy in the past and must be tested before being adopted. Most importantly, CGT is a complex subject, so you should consult a professional before proceeding. Having an adviser on your side will help you maximize all your tax reliefs, allowances, and exemptions, outline your options and advise you on the best course of action based on your individual circumstances. 

 

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