Minimising tax on sale of BTL by contributing to SIPP

Aceace

Asking for a friend...

How do I calculate the maximum that can be contributed to a SIPP to minimise the tax paid on the sale of a BTL property? 

Gross Salary £25k.
NHS pension contribution 7.1%.
£55k capital gain on sale of BTL (bought for £115k 10 years ago, expected sale for £170k in May 2022).
No rental or other income expected in 2022-2023 tax year.
No desire to make additional contributions to NHS pension beyond the 7.1%.
No chance of breaching the lifetime allowance limit. 

TIA

Nebulous2

I'm in a similar position, been working for the NHS and don't need the money, so wanting to put a fair chunk into a SIPP. 

As I understand it, it is complicated. Your friend can put in all their income less the PIA (pension input amount) they can only find that out retrospectively from the pension scheme, after it's too late to contribute.

In practice if their income isn't rising substantially then their annual salary less pension contributions may be close enough. Leaving a little headroom may be sensible. 

They won't be saving any tax of course, they'll still have to pay it but they will be getting tax relief paid into the pension. As such, if they don't need the money from the sale, they could spread their payments over more than one tax year. 

Albermarle

The capital gain and any future rental income is irrelevant for pension tax relief purposes.

Aceace

I thought that making contributions to a SIPP would reduce the amount of CGT that was paid at the higher rate, thus reducing the total amount of CGT. Therefore, maximising SIPP contributions would minimise CGT. Is this wrong? 

Thrugelmir

Aceace said:

I thought that making contributions to a SIPP would reduce the amount of CGT that was paid at the higher rate, thus reducing the total amount of CGT. Therefore, maximising SIPP contributions would minimise CGT. Is this wrong? 

Yes it is. A capital gain is not earnt income. 

Aceace

Thrugelmir said:

Aceace said:

I thought that making contributions to a SIPP would reduce the amount of CGT that was paid at the higher rate, thus reducing the total amount of CGT. Therefore, maximising SIPP contributions would minimise CGT. Is this wrong? 

Yes it is. A capital gain is not earnt income. 

I'm confused. This article: https://www.canadalife.co.uk/technical-support/reducing-cgt-on-gains-using-pension-contributions/  says that SIPP contributions do reduce the amount of CGT that is paid at the higher rate. Is this article wrong too? 

Thrugelmir

My error is misreading your post. The article explains it all. Remember to allow for your employers pension contributions in determing the potential level of your own. 

Albermarle

Yes I misunderstood as well.

 I would think they can contribute to a pension the following .

£25 K minus 7.1 % = £23225 gross = £18580 as the actual net contribution .
Then when they fill in a self assessment form they should enter £23225 as pension contribution .
With the CGT allowance this should just about stop them being a higher rate taxpayer and reduce the CGT tax to 10%

However please wait for confirmation from someone more expert in tax matters.

Aceace

Albermarle said:

Yes I misunderstood as well.

 I would think they can contribute to a pension the following .

£25 K minus 7.1 % = £23225 gross = £18580 as the actual net contribution .
Then when they fill in a self assessment form they should enter £23225 as pension contribution .
With the CGT allowance this should just about stop them being a higher rate taxpayer and reduce the CGT tax to 10%

However please wait for confirmation from someone more expert in tax matters.

Thanks. But I think @Thrugelmir is right, that employer pension contributions need to be taken into account as well. I've found this article https://www.nhsemployers.org/articles/pension-contributions-and-tax-relief that says that the NHS employer pays 20.68%. So, presumably, 27.78% needs to be subtracted to get the actual maximum gross SIPP payment that would qualify for relief. 

I.e. £18,055 gross = 14,444 net. 

Can anyone confirm this? 

Thrugelmir

There's also an earnings cap to be considered. Which will be your annual gross salary. 

For defined benefit pensions, it's based on the capital value of the increase in your pension benefits over the tax year rather than the actual cash contribution made. You'll need to ask for this information from your pension admin. 

Dazed_and_C0nfused

I agree with previous posters about the pension contribution being beneficial in this situation.

Although it has no impact on the amount of the gain that will be taxed it could move more (or all) of the gain into being taxed at 18% rather than 28%.

This is covered in this article.

https://www.canadalife.co.uk/technical-support/reducing-cgt-on-gains-using-pension-contributions/#:~:text=Pension contributions can be used,CGT payable on the gain.

The complication is that a DB pension is involved so although exceeding the tax relief limit doesn't seem to be an issue the annual allowance limit may be.

However given the sale isn't expected until the next but one tax year a lot could change in the meantime!

£55k capital gain on sale of BTL (bought for £115k 10 years ago, expected sale for £170k in May 2023).