If you sell the property, the capital gains tax (CGT) will be payable. The tax will be payable on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. Before the tax the gain will be further reduced by any annual exemption available. The resulting gain is then taxed at either 18% (part of gain which falls within the basic rate band). Or 28% (part of gain within higher and additional rate band), or a combination of the two rates.
From 6 April 2016, a reduction of CGT rates is introduced generally from 28% to 20% (the higher rate band) and from 18% to 10% (the basic rate band). However, in regard of the gains arising on the disposal of residential property that do not qualify for private residence relief, there is no change (28% and 18% rates will continue to apply). CGT is payable on 31 January after the end of the tax year in which the gain is made. From April 2019, on the disposal of residential property a payment on account of any CGT due will be required to be made within 30 days of the completion of the disposal. The above is not required for gains on properties which are not liable for CGT due to Private Residence Relief.
Student lettings
If you have children at college or university, then buy to let may be a good option. However, it is important that the arrangement is structured in the right way. Not the parent, but the student should purchase the property (with the parent acting as guarantor on the mortgage). We will describe below the advantages of this arrangement.
Advantages
First, you will provide your child with somewhere decent to live in a cost-effective way. Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments and other costs.
Second, the amount of rental income chargeable to income tax is reduced by ‘rent a room relief’. This relief is increased to £7,500 per annum from 6 April 2016 (was £4,250 for 2015/16). Please note that if you claim this relief, no expenses are tax deductible. Alternatively, if it is more beneficial, expenses can be deducted from income under normal letting rules.
Third, if the property will be the child’s only property, it will be regarded as their main residence and it will be exempt from CGT on its eventual sale.
If you live in Croydon, Kent and London we, at Adiva Accountants in Croydon, can help you in relation to capital gains and how to minimise your tax liability.
