News from the Residential Property Investor, the bi-monthly magazine for RLA members other artilces from the June / July 04 issue RPI news archive

Capital gains tax warning - June / July 2004

Buy to let investors who think the property market has peaked and who are planning to beat the threats of mortgage rate increases and falling rental yields by selling out, should not forget to factor capital gains tax into their calculations, solicitor James Quarmby has warned.

'For many investors the foray into the buy to let market will be their first experience of CGT. Most people are used to the idea that when they sell a house there will be no CGT to pay, because of the principal private residence exemption (PPRE)', said Quarmby of south east law firm Thomas Eggar. 'This has led many people to believe that there is in fact no CGT on the sale of residential properties, which of course is not true.

CGT applies when selling a residential property that is not your primary residence. It is charged as a "top slice" of your income, so that if, for instance, you are a higher rate taxpayer then the headline rate will be 40 per cent'. It is therefore important to consider, before an acquisition or a disposal, whether there is any planning that can be done to mitigate the CGT, advised Quarmby.

'For example, it may be possible to fragment the ownership amongst your family, so that CGT annual exemption is maximised. If a property is owned by an individual then he or she will only have an annual exemption of £8,200 to set against the gain. However, if the property is owned by husband, wife and two children then there would be four times the annual exemption available, thereby giving a total exemption of £32,800'. Individuals who have a limited number of investment properties it also be able to use the PPRE rules to their advantage, he suggested. 'This is particularly the case for unmarried couples, as they will be able to elect two properties as a private residence, unlike married couples who can only elect one. Furthermore, it is possible to switch the PPRE election from one property to another. If this is done in the right way it can significantly reduce your CGT bill; said Quarmby.
 

other artilces from the June / July 2004 issue

• One sided justification
• Councils to have powers to take over properties
• Norwich launches empty homes scheme
• Conservatives aim to encourage, not discourage, letting
• Foresight needed to cut flood risks
• Government was 'bamboozled' into deposit legislation
• In brief
• Capital gains tax warning
• Remortgaging likely on back of interest rate hike
• RLA's homes2rent.net