Tax experts at specialist landlord accountancy firm Gorilla Accounting are giving the sector fresh advice on minimising CGT liability when selling a rental unit.
Most owner-occupiers avoid CGT because they have Private Residence Relief, so long as they meet certain criteria - chiefly:
- it’s your only home and you’ve used it as your main home since it came into your possession;
- you've not let any part of it out (though this doesn’t include lodgers);
- you haven’t used part of the home for business only;
- the grounds and buildings within the grounds are less than 5,000 square metres in total;
- the property was not purchased purely for investment purposes.
In addition, owner occupiers have a CGT tax-free allowance (similar in principle to the income tax personal allowance): in 2020/21, your allowance is £12,300.
Likewise, you usually avoid CGT on gifts to a spouse, civil partner or a charity.
Landlords with additional properties will be subject to CGT however, and Gorilla Accounting says it’s key for landlords to be familiar with possible liabilities.
If you pay 40 or 45 per cent in income tax (meaning you pay a higher or additional rate), you’ll also have to pay 28 per cent CGT on your gains from residential property and 20 per cent on your gains from other chargeable assets, such as shares that aren’t in an ISA for example.
If you’re a basic rate income taxpayer, the CGT you pay will depend on the amount of the gain itself, your taxable income and the type of asset you made a gain from.
A landlord in this position would have to calculate the amount of taxable income they have, calculate their total taxable gain, and deduct their personal CGT allowance. After adding that to their taxable income, the landlord would have to pay 18 per cent CGT if the resulting amount falls within the basic income tax band.
Gorilla says that landlords have 30 days after the completion date to report and pay CGT on any property disposals; because of the pandemic, HMRC has held back on some late filing penalties over the summer, although how long this will continue is uncertain.