Tax: Where you stand on buy-to-lets and investments
Here are a few more tax-planning points for you to consider – focusing on the tax payable if you sell assets such as buy-to-let properties and investments. Please contact me if you’d like to discuss any of these points.
Capital gains – a reminder of the tax rates
For the current tax year, the first £11,300 of gains is exempt from tax (£11,700 for next tax year, 2018/19). Beyond this, you’ll pay 10%* on any remaining gains that fall within your basic rate band and 20%* on anything in excess of this. So, let’s say your total income from salary, dividends, etc. is £35,000 and you make a capital gain of £51,300. Take off the £11,300 exemption – this leaves a taxable gain of £40,000. Because your other income is £35,000 and because the higher rate threshold this year is £45,000 you have £10,000 of the basic rate band remaining. So, the first £10,000 of the gain drops into the basic rate band and is taxed at just 10%*. The rest of the gain is taxed at 20%*
*if the gain arises from the sale of shares which qualify for entrepreneur relief then the whole gain is taxed at 10% (it doesn’t rise to 20%). That’s the good news. The bad news is that if the gain arises from the sale of residential property then the 10% and 20% rates referred to above are 18% and 28% respectively. That’s not good news if you’re selling buy-to-let properties, for example.
Have you got unused capital losses?
If you’ve incurred losses in the past when selling assets, you may have some unused capital losses which are being carried forward each tax year. These losses have to be offset against the first available gains on selling further assets. So, if this applies to you and if you currently own assets where a capital gain has accrued, consider selling them before the end of the current tax year so as to mop up the losses brought forward. If you’re planning on selling your business, you’ll almost certainly only pay 10% capital gains tax (assuming you qualify for entrepreneur relief) which you almost certainly will). In this case, you want to try and use up any brought forward losses against disposals what would attract a higher rate of capital gains tax as, if you don’t, the losses will be offset against the sale of the business and you’ll then only get tax relief at 10%.
So, if you’ve got unused capital losses (maybe from the sale of shares or property at a loss in the past) and you’ve also currently got assets (e.g. property) on which capital gains tax would be payable on disposal at more than 10%, think about selling the assets with the pregnant gains prior to selling your business.
There’s no capital gains tax on the transfer of assets between spouses. If one of you is a higher rate taxpayer and the other pays tax at the basic rate, consider moving assets to the basic rate partner prior to selling the asset to a third party. If you’re planning on getting married, consider transferring assets (this can include shares in your company) to your new spouse on marriage. It makes sense to spread income-bearing assets (like shares in your company, buy-to-let properties and other investments) around between you. In the case where one of you has a high income (perhaps near to or above the higher rate threshold of £45,000) and the other has a low income, it may be that the likes of buy-to-let properties and other investments would be better held solely by the lower-income partner. The key point here is that there is no capital gains tax issue in moving the assets around in order to get the most tax-efficient mix.
Get the timing right
If you, or both you and your partner are basic rate taxpayers this year but expect to be higher rate taxpayers next year, it would be worth accelerating the disposal of the asset so that it falls into the current tax year. Given what I mentioned in point number one, above, paying CGT at the basic rate of 10% (or 18% if it’s on residential property) is better than paying it at the higher rate of 20% (28% for residential property). The saving, in both cases, is 10% of the value of the taxable gain.
What a difference a day makes
Despite the above point, selling an asset on 5/4/18 will mean you paying the capital gains tax by 31/1/19. Selling it just a day later will push the tax payment deadline back to 31/1/20 as the gain would fall into the following tax year 2018/19. So, from a cash flow point of view, you might want to deliberately delay a sale until the new tax year begins. There would also be the added benefit of slightly more of the gain being exempt (the annual exemption rises from £11,300 to £11,700 on 6/4/18). For assets held in joint names, the two annual exemptions combined will allow disposals with gains of £23,400 to be made without any tax becoming payable. Having said that, you’d have lost out on this year’s exemption as it can’t be carried forward to the next tax year. So, if you’re planning on a few disposals, it makes sense to use up each year’s exemption rather than waste it.