Capital Gains Tax

If you are tax domiciled in the UK and are resident for tax purposes in the UK you will be liable for Capital Gains Tax on any capital gain you make on property, unless it is your primary residence. There is tapered relief from the standard rate of 40% for properties you have owned for many years, albeit the tapering of the tax takes many years to kick-in.

Some people have rolled their properties into a company to reduce capital gains tax liabilities – however, you will then have to pay Corporation Tax on net income and you will likely be held liable for Capital Gains Tax if you were to sell the company or part of it. You will however be able to offset rental income against expenses such as mortgage costs and company operating costs.

The standard main rate of Corporation Tax is 30% (depending on profit levels and company structure). Even if you gear up your property portfolio as prices rise, the tax liability does NOT go away. For instance, if you bought a property at 75,000 pounds and had borrowing of 60,000 pounds (80%), then the value goes up to 160,000 pounds and you gear up to 80% by borrowing to 128,000 pounds by getting an advance of 68,00 pounds – if you sell within say four years at 160,000 pounds, your tax bill will be 34,000 pounds whilst your equity will only be 32,000 pounds. On selling such a property you would have to pay the Inland Revenue 2,000 pounds!

So there are examples of when a property investor cannot afford to sell if prices have risen strongly, they have high gearing and they have re-invested further advances in property. This is a potentially dangerous situation to be in – this is one reason why most Banks and Building Societies normally only lend to between 70-80% of the value of property for investment purposes and look at your total portfolio of assets and liabilities. Your Capital Gains Tax liabilities should be considered whenever you gear up and purchase another property – you need to be able to sell a property to release equity in case you have a large unexpected expense.

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