“Can I Minimise Capital Gains Tax on Property Sales and Help My Children with Their Mortgages?”

If you’re considering selling a property and using the proceeds to help your children with their mortgages, it’s important to understand the potential tax implications. In The Telegraph, a concerned reader, Dianne, wrote to financial expert Mike Warburton for advice on minimising capital gains tax (CGT) while assisting her sons. Here’s what you need to know.

Understanding Capital Gains Tax

When Dianne inherited her two cottages from her parents, this was treated as an acquisition at the market value of the properties at that time. This value serves as the base cost for CGT calculations. Executors handling the respective estates should have this information on file.

When selling the cottages, Dianne’s gain will be the difference between the sale proceeds and the base cost, minus any professional fees or other selling costs. She can deduct her annual CGT exemption, which is currently £6,000, unless it has already been utilized against other gains. However, starting from April 6 next year, this exemption will be reduced to £3,000. Since Dianne did not reside in the properties as her main residence, there are no other reliefs available.

Transferring Properties to Spouse to Minimise CGT

Dianne correctly asserts that transferring one of the cottages to her husband will not trigger CGT. Transfers between married couples (and civil partners) are treated as no gain and no loss events. It’s important to note that her husband would take over her original base cost, not the market value at the time of the transfer.

Calculating CGT on Residential Properties

As the cottages are residential properties, the CGT rate will be 18% on income within the basic-rate threshold, and 28% on gains above that threshold. To illustrate this, let’s look at an example:

Suppose the market value of one of the cottages when Dianne’s father died was £80,000, and it is now worth £180,000. Ignoring costs, the gain on sale would be £100,000. After deducting the £6,000 annual exemption, this leaves £94,000 taxable.

Dianne’s income for the year is £20,270, with a personal allowance of £12,570 and a basic rate band of £37,700. This means her remaining basic rate band would be £30,000.

The first £30,000 of the capital gain will be taxed at 18%, and the remaining £64,000 will be taxed at 28%. The total CGT bill in this scenario would then be £23,320.

Strategies to Minimise CGT

Naturally, Dianne wants to reduce her tax liability. There are several points to consider:

  1. Selling the cottages in different tax years: This means exchanging contracts in different tax years, which can help save tax.
  2. Utilising her husband’s annual CGT exemption and lower-rate tax band: Instead of transferring an entire cottage to him, Dianne should consider transferring only a portion. Beneficial ownership is what matters for CGT purposes, so a simple declaration of trust can achieve this. The solicitor handling the sale can assist with this process.

For instance, if Dianne’s husband has the same income as her, transferring part of the first cottage beneficially to him would result in each of them having a capital gain of £50,000 (£44,000 after the annual exemptions). Their tax bill would amount to £30,000 at 18% and £14,000 at 28%, totaling £9,320. In total, this would save them £4,680 compared to the first example.

Timing the Sales

In the current market, it may take some time to find a buyer. Therefore, it may be prudent to put the cottage with the best chance of selling on the market now. The second cottage can then be listed for sale in the new year, with the intention of exchanging contracts after April 5.

Reporting the Gain to HMRC

Under new rules, individuals are required to report residential property gains to HMRC and pay any tax owed within 60 days of completion. This can be done online or by submitting form PPDCGT, which can be downloaded or requested from HMRC. Unfortunately, the gain will need to be reported again on a self-assessment tax return, as the HMRC system operates independently and cannot transfer data to the self-assessment system.

By carefully considering these strategies and timing the sales appropriately, Dianne can minimise her CGT liability and provide financial assistance to her children. Remember, it’s always wise to consult a tax professional for personalized advice based on your specific circumstances.