:: Capital Gains Tax ::

52 Ways to Save Tax #27

pay less taxAccording to HMRC, there are more than 1.75 million landlords in the UK banking over £14 billion a year in rental income.

If you’re a landlord, then you will have a number of potential tax liabilities on your rental property. In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of income you can pay on your buy to let investment.

52 Ways to Save Tax – Part 26: Claim all the expenses on your ‘buy to let’ property

The income that you receive as rent on investment property is taxable. Unless you are set up as a company, you have to declare any rent that you receive as part of your Self Assessment tax return. The tax is then charged in accordance with your own income tax band:

  • 20 per cent for basic rate taxpayers
  • 40 per cent for higher rate taxpayers
  • 45 per cent for additional rate taxpayers

Bear in mind that adding your rental income to your other earnings may push you into a higher tax band.

You can reduce the amount of tax that you pay by deduction certain allowable expenses from your rental income. These expenses include:

  • Council tax and ground rent
  • Buildings insurance on the property
  • Property repairs and maintenance (although large improvements such as an extension are not income tax deductible)
  • Legal, management and lettings agency fees
  • Other related property expenses
  • Interest on buy to let mortgages (see below)

In 2015, the Government reduced the amount of interest tax relief on buy to let mortgages. These changes come into force in April 2017. Prior to April 2017, tax is payable on your net rental income after deducting allowable expenses including mortgage interest. If you pay higher or additional rate tax you can claim tax relief at your highest rate.

However, from April 2020 tax relief can only be reclaimed at the basic rate, whatever rate of tax you pay. These rules are being phased in over 4 years beginning in April 2017.

Reducing the amount of Capital Gains Tax that you pay

If you sell a buy to let property for more than you paid for it then you may be liable for Capital Gains Tax (CGT).

As well as reducing the amount of tax you pay on your rental income, you can also reduce the amount of Capital Gains Tax you pay when you sell the property. Legitimate ways to reduce your CGT bill include:

  • Using your full CGT annual allowance (£11,100 in 2016/17)
  • Carrying over a loss made on the sale of a buy to let property in previous years
  • Deducting solicitors fees
  • Deducting estate agents fees
  • Deducting the costs of advertising the property for sale
  • Deducting stamp duty
  • Deducting any expenditure on ‘capital’ items

There are also certain tax reliefs available. For example if the property was previously your main residence, the gain may be reduced.

52 Ways To Save Tax #21

pay less taxFor over 150 years, National Savings and Investments has looked after billions of pounds of savings and investments. Over 25 million people save with NS&I and one of the main reasons that the investments are so popular is that many of them offer tax advantages.

We look at the ways that you can save tax by investing with National Savings. Keep reading to learn more.

52 Ways to Save Tax – Part 21: Use National Savings and Investments

National Savings and Investments (NS&I) are backed by HM Treasury. This means that all the money you invest is always 100% secure. While NS&I is not a bank, they offer a range of savings and investment products, some of which offer excellent tax benefits.

Premium Bonds

If you have between £100 and £50,000 to invest then you could consider the tax advantages of Premium Bonds.

Premium Bonds don’t pay interest, but every month your Bonds are entered into a prize draw with the chance of winning a £1 million jackpot and lots of other tax-free prizes. Any prize that you win on your Premium Bonds is tax free, meaning you won’t pay any tax on the returns from your investment – if you win.

Anyone aged 16 or over can buy Bonds and parents, legal guardians and (great) grandparents can invest on behalf of their child or grandchild aged under 16.

Premium Bonds are great if you want to earn tax-free interest. Your money is completely secure and you can cash in your Bonds at any time without penalty. Bear in mind that the returns are determined by a prize draw and so you could invest for years without ever winning a prize.

ISA

A cash Individual Savings Account (ISA) lets you earn tax-free interest with no risk to your capital. NS&I offer a Direct ISA which can be managed online or by telephone and offers a tax-free savings rate.

You can invest up to your annual ISA limit (£15,240 in the tax year 2015/16) and you can access your money whenever you need to. All returns are free of income tax.

Index-Linked Certificates

From time to time, NS&I also offer tax-efficient Index-Linked Certificates. These products are sometimes generally available although often they will be restricted to savers who have existing Certificates that are maturing.

Index-Linked Certificates offer a return in line with inflation, using the Retail Prices Index (RPI). The Certificates often offer a return slightly above the rate of inflation.

The returns from Index-Linked Certificates are tax free, meaning that any interest and index-linking are exempt from UK income and Capital Gains Tax.

52 Ways To Save Tax #15

Pay less tax

Pay less tax by saving into a Junior ISA

There are lots of different ways to avoid paying tax on your savings. In the past we have looked at saving into an ISA and into your pension but if you have a child under the age of 18 you could also consider a Junior ISA.

Junior ISAs are a form of long-term savings account designed to help you to build up a lump sum for your child when they reach the age of 18. Keep reading to find out more about how you could pay less tax with a Junior ISA.

52 Ways to Save Tax – Part 15 : Save into a Junior ISA

You can save into a Junior ISA if your child if your child lives in the UK, is under the age of 18 and does not already have a Child Trust Fund (CTF). If they do have a CTF you can open a Junior ISA but you must ask the provider to transfer the Child Trust Fund into it.

There are two types of Junior ISA:

  • A cash Junior ISA – this allows you to save into a normal savings account but you won’t pay any tax on the interest you receive
  • A stocks and shares Junior ISA – you invest your money and you don’t pay any tax on any dividends or capital growth that you receive

Your child can have one or both types of Junior ISA.

Remember that while parents/guardians with parental responsibility can open a Junior ISA and manage the account, the money belongs to the child. The child can manage the account themselves from the age of 16 but cannot withdraw the money until they are 18.

Saving into a Junior ISA

Anyone can pay money into a Junior ISA and you will benefit from tax free interest/growth on your savings. And, because anyone can contribute to a Junior ISA, they are useful for building up savings from relatives – for example birthday or Christmas gifts.

As with the adult ISA, there are limits to the amount that you can save every tax year. In the 2015/16 tax year, the maximum you can save in total in a Junior ISA is £4,080. This maximum sum applies to the total ISA savings.

For example, if you have saved £2,000 into a cash Junior ISA in the 2015/16 tax year you will only be able to save a maximum of £2,080 into a stocks and shares Junior ISA in the same tax year.

You can transfer money between your child’s Junior ISAs and between a Child Trust Fund account and a Junior ISA but you can’t move cash between an adult and a Junior ISA.

The benefits of a Junior ISA

There are lots of benefits to saving in a Junior ISA:

  • All interest in a cash Junior ISA is paid tax-free
  • All dividends and capital growth in a stocks and shares Junior ISA is tax free
  • Parents/guardians manage the account but anyone can pay in
  • Child cannot access/withdraw the money until they are 18
  • You can build up a savings nest egg for your child which they can use when they are older
  • You can transfer your Child Trust Fund into a Junior ISA

52 Ways To Save Tax #14

There are lots of ways that you can reduce the amount of tax that you can pay. And, with a range of different taxes affecting everything from your income to your insurance, the ways of mitigating the tax that you pay vary depending on the type of tax.

Capital Gains Tax can be charged on the profit or gain made when you sell, gift, transfer, exchange or dispose of an asset. If you’re a higher rate taxpayer then you can face a tax bill of up to 28 per cent but there are ways to reduce the amount that you pay.

Keep reading to find out how transferring assets that you own into joint names or into the name of your spouse/partner can help you to reduce the amount of Capital Gains Tax that you pay.

52 Ways to Save Tax – Part 14 : Transfer assets to your spouse/partner

Capital Gains Tax (CGT) is payable on the profit that you make when you sell or gift an asset. And, like other types of tax, each individual has an annual personal CGT allowance.

John Fletcher, director of financial planning at Brewin Dolphin, explains: “Each individual has a personal CGT allowance every year (6 April to 5 April), which for many investors is sufficient for avoiding a CGT liability.

“Any gains in excess of the allowance are charged to CGT at either 18 per cent or 28 per cent, depending on the individual’s other total taxable income in the year the gain arises.”

The current personal CGT allowance (tax year 2015/16) is £11,100 and this applies when you sell assets such as shares or a house. It effectively means that in the 2015/16 tax year you can make a profit of £11,100 on an asset (or assets) before you pay any tax on the gain.

One way to reduce the amount of CGT that you pay is to consider transferring assets into joint names or to your spouse or partner’s name. Transfer between spouses is currently exempt from CGT which means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used.

By transferring an asset into your joint names, you can both make use of your tax-free CGT allowance so that up to £22,200 of any gain can be tax-free in 2015-16. For example, transferring a rental property into joint names means that you can benefit from £22,200 ‘tax free gain’ when you come to sell the asset.

Remember that the transfer to your spouse or partner must be a genuine outright gift.

Mel Kenny of advisers Radcliffe & Newlands says: “Those in poor health may have worries about their financial planning and paying too much tax.

“One consideration for married couples with big gains sitting on their assets is to transfer these assets of the spouse in good health to the spouse in poor health so that capital gains are wiped out on death and the value is rebased from that date.”

52 Ways to Save Tax #10

If you sell an asset for a profit then you may have to pay tax on the money that you make. This is called ‘Capital Gains Tax’ and could leave you with a sizeable tax bill if you sell shares, antiques or investment property for a profit.

In the next part of our series ‘52 Ways to Save Tax’ we look how you can pay less tax by using your annual Capital Gains Tax allowances. Keep reading to find out more.

52 Ways to Save Tax – Part 10: Use your Capital Gains Tax allowance

Capital Gains Tax (CGT) is the tax that you pay on the profit that you make when you dispose of an asset. Remember that any tax that is due is paid on the ‘gain’, not the whole amount you sell the asset for.

For example, you buy a painting for £10,000 and sell it for £50,000. The ‘gain’ you make is £40,000 and any CGT that is due would be paid on this amount.

It is not just selling an asset that creates a potential Capital Gains Tax liability. You may also have to pay tax if you gift an item to someone else, swap it for another asset or if you got compensated for it (for example if you received an insurance payout because an asset was destroyed).

When you may have to pay Capital Gains Tax

You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell/dispose of a personal possession for £6,000 or more. Assets on which CGT may be payable include:

  • Jewellery
  • Paintings
  • Shares not held in an ISA or PEP
  • Antiques
  • Stamps and coins
  • Property that is not your main residence

When you don’t pay Capital Gains Tax

There are certain items that are exempt from Capital Gains Tax and certain annual exemptions that you can use. These will help you to dispose of an asset on which you have made a gain without having to pay any tax.

You don’t pay CGT on:

  • NISAs, ISAs or PEPs
  • Betting, lottery or pools winnings
  • UK Government gilts
  • Premium bonds
  • Personal possessions with a lifespan of less than 50 years
  • Most gifts to your husband, wife, civil partner or a charity
  • Your car – unless you’ve used it for business

You also have an annual Capital Gains Tax allowance, called the Annual Exempt Amount. This means that you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance which, in the tax year 2014/15, was £11,000.

Working out your gains

You won’t pay any Capital Gains Tax if your total taxable gains are below your annual Capital Gains Tax allowance (£11,000 in the 2014/15 tax year). To work out what your gains are you should:

  • Work out the gain you have made on each asset that you have disposed of in the last tax year (shares, personal possessions etc)
  • Add together the gains to make a total
  • Deduct any allowable losses

If your total gains are below your allowance you won’t have any Capital Gains Tax to pay.

If your gain is above the CGT allowance then you will have some tax to pay. The basic rate of CGT is 18 per cent although higher rate taxpayers – which may include you if your gains added to your other income carry you into the higher band – pay 28 per cent.