How to Manage Capital Gains Tax Following a Property Sale

If you’ve recently sold a buy-to let-property or second home, it’s likely you are dealing with Capital Gains Tax (CGT) and may not know how best to manage your tax situation

Lead image: Getty Images/iStockphoto

The Granville Group in Essex has joined forces with The SidebySide Partnership to help you manage the impact of CGT following a property sale.

James D’Mello, head of business development at London’s The SidebySide Partnership, explains how higher-rate taxpayers can use tax planning and tax-efficient investment funds to defer a capital gain and benefit from inheritance and income tax relief.

Here, he shares an intriguing case study to help you understand more…

The scenario: Harry has sold three buy-to-let properties and now must pay Capital Gains Tax

Capital Gains Tax is a tax on any profit you make upon disposal of an asset, it applies to most assets when they’re sold. Capital Gains Tax is applicable when assets are inherited (and then sold) and even gifted.

Harry Wilkins has owned three buy-to-let properties for over 15 years. However, changes to how rental property is taxed, amendments to tenancy laws and cuts to mortgage interest relief, have made owning this property less beneficial than it once was and now Harry has decided he wants to sell.

He initially paid £300,000 for the three properties and sells them for £700,000, following deductions from solicitors and fees. This leaves him with a capital gain of £400,000. Harry will only pay CGT on his capital gain, not the full sale amount.

How to avoid capital gains tax on property: Invest the £400,000 wisely and claim back the CGT in income tax relief

If he invests the £400,000 wisely, Harry could claim back the amount he paid for his CGT and receive £120,000 of income tax relief (photo: Getty Images/iStockphoto)

How much Capital Gains Tax will he need to pay?

Harry owes £112,000 CGT (taxed at a rate of 28%) on his £400,000 gain. He needs to report the gain to HMRC and pay the tax within 30 days of completion.

How can he defer his capital gain?

Tax-efficient investment strategies can help him defer the CGT he needs to pay by investing the full amount.

If he invests the £400,000 wisely, Harry could claim back the amount he paid for his CGT and receive £120,000 of income tax relief.

If he holds onto his shares for at least two years, he could also qualify for up to £160,000 on inheritance tax relief on his investment. This can help protect his assets from inheritance tax when they are passed on.

Can Harry continue to invest and defer his capital gain?

He can continue to defer his gains if the investments are sold, and he re-invests the proceeds. If Harry passes away two years after opening his investment fund, the deferred capital gains would expire on his death.

How to manage capital gains tax after selling a buy-to-let property

Tax planning can help you manage your capital gains after selling a buy-to-let property (photo: Getty Images/iStockphoto)

Do exemptions apply to Capital Gains Tax?

Harry is entitled to an annual CGT allowance for the year. The CGT tax-free allowance for 2020/21 is £12,300. By deferring his capital gains, Harry can use his tax-free allowance to maximise the amount he can receive.

What could happen to Harry’s capital gains with no financial planning?

Without tax-planning, Harry will need to pay £112,000 CGT. This will leave him with a profit of £288,000. If passing this money on, a potential £115,200 worth of inheritance tax may be applied. This would leave £172,800 of his initial gain of £400,000 that could be passed on to his loved ones.

If you’re in a similar situation to Harry, what can you do to manage your capital gain?

Get in touch with a member of the team at The SidebySide Partnership to discuss your investment options and what tax solutions are available. The investment portfolios are made up of companies founded and based in the UK. You can invest in young British companies and their future.

The Granville Group’s expertise within the property sector, combined with The SidebySide Partnership’s decades of experience in tax-efficient investment solutions, can help you to manage the impact of Capital Gains Tax.

Visit granville.co.uk/tax-solutions to find out more