Question: I currently live in my property which I previously rented out for 17 years and then rebuilt. I have now owned the house for 23 years and have lived in it for the past six years. Please can you tell me if it is possible to transfer my capital gains tax liability to my next house which I will live in? I’m concerned that if I sell my current house and have to pay the tax on selling, I might struggle to buy another property. What do you advise?
Answer: I can understand why you might be worried but the tax hit you’re fearing might not be too dramatic. I’ll explain why, but I will say early on that I think the help of a professional tax adviser may be beneficial to you. They are qualified and regulated, and will be able to support you in working through a range of solutions to legally minimise your tax bill.
However, it’s worth explaining the fundamentals of calculating your capital gains tax liability when it comes to selling a property. The first being that you don’t pay capital gains tax on the entire sale price of the property – only the difference between the purchase price and sale price, after tax reliefs, deductions and allowances.
If you only own one property, and live in it all your life, you don’t pay any tax on the profit you make. This is because you are covered by something called ‘private residence relief’. You are even covered by this tax relief for the portion of the time you lived in the property you previously rented out.
I find it’s helpful to think of the period of ownership of your property in months. You’ve owned the property for a total of 23 years, or 276 months. Out of those months, you’ve lived in the property 72 months. You also benefit from an additional nine months of private residence relief, meaning there are 81 months of ownership against which capital gains tax cannot be calculated. This amounts to 29 per cent of ownership – therefore capital gains tax is calculated on 71 per cent of your profits. That’s the first step in reducing your bill.
The second step to calculating your taxable profit is where you’ll be able to drive your liability right down, as you are able to deduct certain expenses from your profit. These can be quite significant – for example, any conveyancing and estate agency fees. Critically, you can deduct costs relating to ‘improving assets’ – such as the cost of an extension.
In HM Revenue and Customs’ property income manual – a sort-of bible for property tax rules – there’s more detail on this. It confirms that: ‘Alterations to a building may be so extensive as to amount to the reconstruction of the property. This will be capital expenditure’ meaning it can be deducted from your taxable profit (rather than to offset any income tax liability arising from rental profits). This could also include the cost of redecorating the property after the work was completed. You cannot deduct the costs of upkeep of the property (such as cleaning, or general redecoration), nor any mortgage interest you’ve paid.
The final way to reduce your bill is to apply your capital gains tax-free allowance – you only pay tax on what’s left of your profits after this amount. In the current tax year, starting on 6 April 2021 and ending on 5 April 2022, this is £12,300. If you own the property jointly with a partner, you can apply both of your allowances to benefit from £22,600 in tax-free profits.
Once you arrive at your final taxable profit, the actual rate of tax you pay will depend on your income from other sources. If the combination of your capital gain and other income is less than £50,270 (making you a basic-rate taxpayer), you’ll pay a capital gains tax rate of 18 per cent on your profits. If your income already exceeds £50,270 (making you a higher-rate taxpayer), you’ll pay 28 per cent. If the capital gain tips you over from being a basic-rate taxpayer to a higher-rate taxpayer, you’ll pay 18 per cent on the difference between your income and £50,270, and 28 per cent on anything above that amount.
Gareth Shaw is the Head of Money at which.co.uk.Internet Explorer Channel Network