How to reduce your tax bill: Property investments
Many business owners look to property as an alternative to a personal pension. But when it comes to selling up, how can the tax payable be kept as low as possible? Lesley Stalker, head of tax at Robert James Partnership, explains.
For a long time now business owners have looked to property as a safer alternative to having a personal pension. A large proportion of entrepreneurs now own more than one property and indeed have used the equity within their property interests to fund business expansion.
But what about when it's time to sell up and release some profit from these investments? How can the tax payable on any gains be minimised? By carefully using your right to elect appropriate properties as your principal private residence (PPR), there are numerous ways those with more than one property available for private use can limit their tax bills.
This second article in the monthly series from Robert James Partnership considers two common scenarios. Firstly, what options exist for entrepreneurs whose work dictates they have to move and rent out their main residence? And secondly, how can those with holiday homes limit their future exposure to capital gains tax (CGT)?
The basic tax treatment on the disposal of a home nominated as a PPR is that any gain is exempt from capital gains tax provided the property has been the individual's only or main residence throughout their period of ownership. This of course also means that any loss incurred is not an allowable loss.
Re-location, re-location
With mobility levels in the UK so high it is very commonplace for a PPR to be rented out because work issues require a re-location. In these situations, it is still possible to qualify for some capital gains tax relief provided the property has been the owner's only or main residence at some time both before and after the period of absence, and that during the period of absence no other residence qualifies for the relief. The qualifying criteria for these circumstances are:
i) An absence for 3 years for any reason (not necessarily a consecutive period);
ii) Up to 4 years if the duties of a UK employment require re-location elsewhere;
iii) Any period of absence abroad where employment duties require re-location abroad.
If these periods are exceeded, only the excess is counted as a period of non-residence and the tax payable is adjusted accordingly. Note that if you are required to move directly from one place of employment to another, meaning that it is not possible to return to your PPR immediately after an employment-related absence, the condition for residence both before and after is waived.
In addition, the last three years of ownership are also exempt from capital gains tax, irrespective of the use of the property during this period, provided the property has been the individual's PPR at some point during their period of ownership.
It is therefore possible to have quite prolonged periods of absence from a property without losing any part of the PPR exemption. Although HM Revenue and Customs (HMRC) has increased its focus on the way exempt periods are calculated in light of the sharp rise in property prices, tax planning opportunities still exist using the so-called time apportionment basis.
Example 1 below illustrates how this would be done in practice:
- Mr Smith bought his home (PPR) in January 1999 for £200,000;
- He lived in the property until January 2000 when he moved to oversee the opening of a new office;
- He rented the property out from January 2000 until January 2008 when he sold it for £700,000.
- Overall, even though he only lived in the property for one year he would be eligible for CGT relief for the entire eight year period as follows:
One year of actual residence;
Four years for employment-related absence; and
The last three years which are always exempt when a property has been a PPR.Therefore no capital gains tax would be payable on the disposal.
There are other possible exemptions for property owners to utilise. For instance, if a property has been an individual's PPR and it has been rented out, there is a lettings exemption available, which is the lower of an amount equal to the PPR exemption and £40,000.
In addition, a husband and wife both have an equal entitlement, making the relief on the disposal of jointly owned property either the lower of an amount equal to the PPR exemption or £80,000.
Holiday homes
For the many business owners who have invested in a second property for holiday use, similar tax planning opportunities exist.
Basically the rules are that provided the property is available for the owner to occupy – either in the UK or abroad - it is possible to nominate this as a PPR within two years of ownership, regardless of whether it is actually being occupied as such.
The only caveat to this legislation is that such an election cannot be made for a property the owner has never lived in. Once a PPR election has been made it can be revoked at any time, and that revocation can be back-dated by up to two years.
The example below highlights the opportunities to plan ahead to minimise tax payable on an eventual holiday property sale:
- Mr & Mrs Smith jointly own three properties
- Property one has been their PPR since January 2000;
- In January 2007 they purchased property two in France, which they have used as a holiday home;
- In January 2008 they purchased property three which they moved into immediately and they commenced to rent out property one.
- If no PPR elections are made property two will be fully chargeable to CGT on disposal; properties one and three will qualify for the PPR exemption for the periods of residence and for the last three years of ownership, with property one also qualifying for a lettings exemption.
It is also possible to elect for property two to be treated as their PPR for a six month period provided this election is made within two years of the purchase of property three. Doing this would secure the availability of the PPR exemption for property two for the last three years of ownership, and would have little detrimental impact on the capital gains tax calculations for property one or property three.
So, whilst the regulations governing the treatment of capital gains arising on property have been reviewed, there are still many ways a good tax adviser can help you to plan ahead to minimise your ultimate liability.
- PPR exemptions are available for employment-related absences and also for other absences of up to three years for any purpose. Absences do not need to be consecutive, or fall during the last three years of ownership.
- A property which has been your PPR at any time will qualify for the PPR exemption for the last three years of ownership, whether you are living in it during those last three years or not.
- If you have property listed as your PPR which is also rented out, consider the benefits of a joint ownership between husband and wife/civil partners to secure the dual lettings exemption of £80,000.for both. But watch out the transfer doesn't mean PPR exemptions are lost.
- If you own more than one property it is wise to routinely review the capital gains tax planning opportunities available from making and subsequently revoking PPR elections.
- Routinely make PPR elections within the two year time limit because it gives you flexibility and can always be revoked.
- If you are using a property for business purposes, ensure it has an element of private use to protect the availability of the PPR exemption and that any relief claimed against rental income reflects this.
- If you want to sell off land separately to property, make sure you sell it before the property and garden are sold to preserve the PPR exemption.
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BusinessZONE - 27-Aug-2008
Categories: Money matters
Story read: 4012
