The Importance of Understanding Tax When Buying or Selling Property

The ubiquitous ‘they’ tell us that there are only two certainties in life; death and taxes. 

Since we are a positive and optimistic lot, I’ll gloss over the first of those, but the second, tax when buying or selling property, is something we and our clients take a keen interest in.

Buying and selling property invariably entails handing something to the government, be it Land and Buildings Transaction Tax (Stamp duty as it is still known in England), or Capital Gains Tax (CGT) payable on the profit from a sale.

When you are selling rental properties the situation becomes more complicated and it is important for landlords to fully appreciate the tax implications of their actions when it comes to selling or acquiring properties.

In this blog, we’re going to look at the tax exposures most often encountered by landlords and what steps you can take to optimise your tax position when buying and selling properties in your portfolio.

I’ll offer this piece of advice upfront – a good accountant is your very best friend. It’s such a good piece of advice, you’ll find it repeated throughout the blog!

Taxes when selling property

Governments are keen to ensure that they don’t miss an opportunity to fill their coffers, so you will encounter taxes which apply both when selling and buying properties.

Since any tax on property transactions will affect your return on the investment, it is important to understand their impact fully as well as what you can do to mitigate their effect.

When selling a buy-to-let (BTL) property you will be required to pay CGT on the profit realised beyond your personal allowance of £12,300 per annum. CGT is charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers.

You should also be aware that following rule changes from the 27th October 2021, the correct amount of capital gains tax must be calculated, reported and paid to His Majesty’s Revenue and Customs (HMRC) within sixty (60) days of completion.

If you wait until your annual tax return before notifying HMRC of the gain, you will most likely find yourself facing interest and penalty charges.

Where you operate as a limited company, those same profits will be taxed at the prevailing corporation tax rate, currently 19%, however we wait to see if the new government led by Liz Truss will change this.

Taxes when buying property

When adding to your portfolio, you will have to factor in both LBTT and ADS (Additional Dwelling Supplement).

LBTT is charged on a sliding scale depending upon the value of the property, ADS was introduced to try and skew the market away from commercial purchase of residential properties and towards first time buyers. The Scottish Government says:

“The ADS forms part of the Scottish Government’s drive to protect and support opportunities for first-time buyers in Scotland. It reinforces the progressive approach in place for LBTT rates and bands. It also raises vital revenue to support public services in Scotland.”

ADS is currently charged at the rate of 4% of the total purchase price of any additional residential property, where the purchase price exceeds £40,000.

There are a number of online calculators which help you work out how LBTT and ADS affect you and your proposed purchase.

As with all online resources, treat them as guidance and speak to your accountant or solicitor to get a definitive cost. We’ll be happy to talk through your options and the likely cost of adding new property to your portfolio.

What can you do to optimise your tax when buying or selling property?

We appreciate that we cannot change the tax legislation, however there are a number of steps you can take to ameliorate the accrued cost of the taxes.

Doing so will involve your faithful accountant to ensure that, whether you are operating as a limited company or sole trader, you take advantage of all the deductions you can with regards to your portfolio.

TIP: More information can be found in this useful article about reducing capital gains tax.

Making Tax Digital

A good example of entitlements which are often overlooked can be found in this blog. It is also important that all landlords know that HMRC are extending their ‘Making Tax Digital’ (MTD) to cover landlords from 2024. This will change the way landlords have to submit their taxes.

One of the major changes landlords will see is the requirement to submit returns to HMRC quarterly rather than annually. They will also need to get to grips with online accounting software such as Xero and others. This is a fundamental requirement of MTD.

The change from annual to quarterly reporting may seem onerous, however the experience of those already using MTD and accounting software suggests that the transition isn’t as bad as you might fear.

Limited Company

One of the commonly employed approaches is to manage your portfolio as a limited company rather than as a sole trader. Doing so means that all profits are taxed at the Corporation Tax rate of 19%.

If you are already a higher rate tax payer, this is far more attractive that the 28% CGT rate you could otherwise expect. You will incur additional costs and responsibilities as a limited company, but these are not overly onerous.

Here’s a useful table illustrating the key differences between the two operating options. Again, this is something that you should discuss with your accountant. They are best placed to advise you of the pros and cons of both options.

Nominate a new main residence

If you decide not to follow the limited company route, there are other options open to you. You might consider nominating a new main residence if one of your properties is likely to be unoccupied for some period.

This is not an uncommon practice however there are conditions you must be aware of. The move must be genuine, and that means being able to show that you do indeed live in the property.

ADS Relief

Despite the Scottish Government’s stated aims for ADS, relief is available when buying multiple properties. Where a purchase involves six or more separate dwellings in one transaction.

So, if you were buying a portfolio, full relief in respect if ADS applies to the transaction providing that section 59(8) LBTT(S)A 2013 applies.

You must claim this relief in the first LBTT (Land and Buildings Transaction Tax) return made in relation to the transaction, or in a later amendment to that LBTT return.

Joint ownership

An individual has a Capital Gains Tax (CGT) allowance of £12,300.  Like other tax allowances, this can be combined with the allowance of your spouse if the property is held jointly.

This means that when selling a property that is jointly owned, you can benefit from up to £24,600 of CGT relief. There are additional considerations if your spouse is in a lower income bracket to you.

In this situation, transferring some or all of the property to your spouse could cut your CGT liability when the property is sold.

Advice from the property pros

In all matters concerning tax when buying or selling a property, your accountant is your greatest ally. That will be no surprise given what’s gone before, but we cannot overemphasise the value of their knowledge and experience.

Tax when buying or selling a property is inevitable, but mechanisms exist to allow companies and individuals to offset legitimate costs and expenses against that inevitability. Pursuing these is just good business and worth your while.

Understand the tax implications of your decisions. They may not affect your annual yield significantly but they can affect your cash flow, especially the demand to pay CGT within sixty days of the transaction.

In summary…

Having to understand tax when buying and selling property is something all landlords face, some more regularly than others. There is no magic surrounding the implications involved, but understanding the effect on your overall position pays dividends.

At the danger of repeating myself for the umpteenth time, speak to your accountant about these decisions. They should be able to give you an accurate picture of the short and longer term effects on your finances.

As always, if you need advice, or help, call us. This is our passion, it’s what we do and we are always happy to offer help where we can. We are also more than happy to point you in the direction of other specialists if necessary.

So, don’t lose sleep over property taxes, a bit of professional advice and homework should ensure that you enjoy restful nights!

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]