Selling Buy to Let Property

Rob749

Hello everyone, need some advice on my son's behalf, I've found some info online and want to make sure it is current and correct. My son is selling a property which is not his main residence, and he is under the impression that the equity (£42 - £45K) can be used without paying tax, if he buys a holiday home (static van) which will also be a holiday let.
From what I've read, I don't think so. I've read that the sale has to be declared to HMRC for CGT purposes within 30 days of the sale, and can't find any reference to buying something else, and not paying tax on the equity. He is looking for ways to reduce his tax bill, I think he will have to pay tax on the remainder after CGT allowance is applied, and this will not affect his income tax (basic rate taxpayer). He is not planning to make any alterations to the rental property he is selling.
Any advice gratefully received, and can someone please confirm or correct the info I have found. Thanks.

Jeremy535897

Your son is incorrect, unless the property he is selling qualifies as a furnished holiday let (and your post suggests that it might). See:
https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2018
https://www.gov.uk/government/publications/business-asset-roll-over-relief-hs290-self-assessment-helpsheet/hs290-business-asset-roll-over-relief-2021

Note that a static caravan is presumably a depreciating asset.

[Deleted User]

The other point is that tax is not paid on the equity (sale proceeds less mortgage) but profit (sale proceeds less purchase cost less legal fees). Big difference!

Rob749

Jeremy535897 said:

Your son is incorrect, unless the property he is selling qualifies as a furnished holiday let (and your post suggests that it might). See:
https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2018
https://www.gov.uk/government/publications/business-asset-roll-over-relief-hs290-self-assessment-helpsheet/hs290-business-asset-roll-over-relief-2021
 
Note that a static caravan is presumably a depreciating asset.

Sorry, I think I misled you with my grammar error !
What I meant was, he wants to buy a static van on a holiday park with the equity from his second property, which was let as a normal rental for the last 12 or so years. He will use the van as a holiday home, and also let it out to holidaymakers in between.  Just wanted to clarify his tax position on the let property profit, obviously looking for a way to reduce his tax bill on the profit (I now understand, i.e. not the equity - thanks purdyoaten2 . Also, is the information in the last paragraph on CGT correct? Any advice appreciated, should he be consulting an accountant or FA at all ? Thanks.

Jeremy535897

The capital gain on a normal let property cannot be rolled over. The capital gain will be computed as follows:
Sale proceeds, less selling costs (solicitor, estate agent), less purchase price, less acquisition costs (solicitor, stamp duty), less the cost of any improvements that are reflected in the value of the property when sold. This is the gross gain. From this may be deducted the annual exemption of £12,300 (unless used elsewhere) and capital losses, if any. As purdyoaten says, the mortgage is irrelevant.

The gain must be reported, and the tax paid, within 30 days of completion. See:
https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax

Rob749

Hi Jeremy535897, thanks for the comprehensive reply, don't really need an accountant or solicitor then, seems pretty straightforward? So this profit doesn't affect income tax in any way at all then, is that right? Also there seems be no way around paying tax on the profit gained, unless you spend money on improvements to the property before sale. Is that also right? Appreciate the advice. Thanks again.

[Deleted User]

Rob749 said:

Hi Jeremy535897, thanks for the comprehensive reply, don't really need an accountant or solicitor then, seems pretty straightforward? So this profit doesn't affect income tax in any way at all then, is that right? Also there seems be no way around paying tax on the profit gained, unless you spend money on improvements to the property before sale. Is that also right? Appreciate the advice. Thanks again.

There is a oft repeated phrase - don’t let the tax tail wag the dog. If you spend, say, 20000 in improvements you would reduce the tax bill by 3600. You would be 16400 worse off financially and the new owner would benefit from the improvements that you paid for.

Jeremy535897

purdyoaten2 said:

Rob749 said:

Hi Jeremy535897, thanks for the comprehensive reply, don't really need an accountant or solicitor then, seems pretty straightforward? So this profit doesn't affect income tax in any way at all then, is that right? Also there seems be no way around paying tax on the profit gained, unless you spend money on improvements to the property before sale. Is that also right? Appreciate the advice. Thanks again.

There is a oft repeated phrase - don’t let the tax tail wag the dog. If you spend, say, 20000 in improvements you would reduce the tax bill by 3600. You would be 16400 worse off financially and the new owner would benefit from the improvements that you paid for.

If you spent £20,000 on improvements and they had no effect on the sale price, they would not be deductible at all!

The rate of capital gains tax depends on your son's income. See: https://www.gov.uk/capital-gains-tax/rates

Rob749

Thanks for all that. Yeah I agree going down the improvement road would be a waste of time and effort.
So if the profit on the property potentially pushes my son's income into the higher rate tax bracket, that could mean that some of the profit would be taxed at the CGT higher rate of 28% and not 18%. Am I correct in that assumption? Only I did hear somewhere that the income tax bracket stays the same, as the CGT is a separate tax, so the 18% would apply on the whole amount, not sure if the source was reliable though.
If this isn't the case, can someone please work out what the CGT would be on say £40000 profit, if my son was earning £33000 a year? I think I have worked it out, but just want to make sure I have made all the correct assumptions before I pass the info on.

Rob749

Sorry Jeremy535897Jeremy535897 said:

purdyoaten2 said:

Rob749 said:

Hi Jeremy535897, thanks for the comprehensive reply, don't really need an accountant or solicitor then, seems pretty straightforward? So this profit doesn't affect income tax in any way at all then, is that right? Also there seems be no way around paying tax on the profit gained, unless you spend money on improvements to the property before sale. Is that also right? Appreciate the advice. Thanks again.

There is a oft repeated phrase - don’t let the tax tail wag the dog. If you spend, say, 20000 in improvements you would reduce the tax bill by 3600. You would be 16400 worse off financially and the new owner would benefit from the improvements that you paid for.

If you spent £20,000 on improvements and they had no effect on the sale price, they would not be deductible at all!

The rate of capital gains tax depends on your son's income. See: https://www.gov.uk/capital-gains-tax/rates

Sorry, I didn't see this before I wrote my reply, forgot to refresh page ! So in effect it does affect the rate he will pay CGT. Think I've got it now. Please feel free to reply to my above post if something I wrote is incorrect. Cheers everyone.

Jeremy535897

Rob749 said:

Sorry Jeremy535897Jeremy535897 said:

purdyoaten2 said:

Rob749 said:

Hi Jeremy535897, thanks for the comprehensive reply, don't really need an accountant or solicitor then, seems pretty straightforward? So this profit doesn't affect income tax in any way at all then, is that right? Also there seems be no way around paying tax on the profit gained, unless you spend money on improvements to the property before sale. Is that also right? Appreciate the advice. Thanks again.

There is a oft repeated phrase - don’t let the tax tail wag the dog. If you spend, say, 20000 in improvements you would reduce the tax bill by 3600. You would be 16400 worse off financially and the new owner would benefit from the improvements that you paid for.

If you spent £20,000 on improvements and they had no effect on the sale price, they would not be deductible at all!

The rate of capital gains tax depends on your son's income. See: https://www.gov.uk/capital-gains-tax/rates

Sorry, I didn't see this before I wrote my reply, forgot to refresh page ! So in effect it does affect the rate he will pay CGT. Think I've got it now. Please feel free to reply to my above post if something I wrote is incorrect. Cheers everyone.

Yes. If income say is £26,000, and the gain after exemption is £50,000, you pay capital gains tax at 18% on £50,700 - £26,000 = £24,700, and at 28% on the remaining £25,300.