Need some direction on how to lower your tax liability from property sales this year? Check out this guide for 10 simple tips to help get tax relief in 2022.
As 2022 draws near its end, many people start thinking in earnest about their tax liability because before you know it, it will be time to file with HMRC, a task no one gets excited about. It is especially important if you are a higher rate taxpayer, if you have rental properties or if you sell a property within the current tax year.
Inevitably, you will have to pay CGT (capital gains tax), and lots of it, if you cannot find a way to lower your tax liability. Thankfully, for those who know how to do their tax efficiently, there are many avenues to take that can help to decrease your tax burden. Want to know how to lower tax liability from property sales this year? Read on to find out!
1. Leverage your Expenses
As the saying goes, “It costs money to make money”. The government understands this piece of sound logic and allows you to deduct the expenses of operating and selling your property. This can be mileage driven in the name of your properties, cleaners and landscapers, repairs and anything else that was an expense in the name of running and selling a property. Make sure to keep any receipts and be ready to justify the expenses if the government asks any questions.
2. Use your Allowance
Every adult in the UK is allowed a £12,300 CGT exemption. When it comes time to pay capital gains tax, make sure you use this CGT allowance to your benefit. The HMRC will gladly take your money and won’t force this exemption upon you. This doesn’t mean that all of your capital gains will be tax-free but you can at least gain some relief on the first £12,300.
3. Report your Losses
Capital gains that you make in any calendar year can be offset against any losses that you incurred in the same year. This is another great way of potentially offsetting your CGT burden. If you go over your allowable limit, losses can be transferred from up to 4 years after you offloaded the asset you took a loss on.
4. Save for the Future
Saving for the future is great advice, no matter what you’re trying to accomplish. When it comes to the end of the tax year, it really pays to save for the future. How? Invest in your pension! Why? By investing in your pension, you are increasing the level of income you need to make to be taxed at a higher rate. For those who invest £7,500 in their pensions, their base rate income tax band would increase accordingly for that tax year.
5. Reduce your Income
It is well known that basic-rate taxpayers pay substantially less tax than higher-rate taxpayers. When it comes to capital gains on residential property, this fact remains true. Base rate tax-payers pay 18% capital gains whereas higher rate tax-payers pay 28% capital gains on sale of residential properties… a substantial difference. For this reason, it makes sense to reduce your income to maintain those lower income tax rates. This can be done in a number of ways which can be discussed with a tax professional.
6. Give to Charity
Giving to a great charity is an investment in the future. Your money can go a long way when given to the right charity. It can also help you keep more of your money as well. Giving money to charities increases your income tax band and keeps you in a lower tax bracket, meaning that whatever capital gains that you do make, along with your other taxable income, that falls below the threshold will be taxed at only 10% instead of 20%.
7. Gift Property Away
On the face of it, giving property away seems like a poor plan of action when it comes to building wealth. However, when given to the right person, it can make a big difference in your taxes. In the UK, you can gift assets to your spouse, whether that be shares or residential properties. The motivation behind this wonderful gift is that, when given, it doubles the CGT allowance because there is now dual ownership. Wonderful gifts indeed!
8. Change your Residence
The profits from the sale of your main residence are tax-free, meaning that it may make sense for you to change your main residence to a property that will lead to excess capital gains. Now, is it possible to do that if you are not actually using it as a main residence? No. The regulations around this particular rule are quite strict so it makes sense to do your research before changing the location of your main residence.
9. Watch the Calendar
Sometimes it makes sense to wait to make the sale, even if the deal sounds right. If you have already maximised every option and claimed all available tax relief on your properties and your taxable income, it may make sense to wait to sell. Waiting to sell, whether you are selling a rental property or a residential property, will put any additional capital gains in the next tax year, allowing you to use that new year’s available tax relief.
10. Start a Company
Selling properties is a business. If you own a limited company that does your property sales for you, it can leverage deductions, such as the interest on mortgages, as expenses against their income, whereas you cannot. This can make a drastic difference in the amount of CGT owed at the end of the year. You will still be responsible for the stamp duty, among other tax obligations but your company will have other options to reduce your tax burden that you won’t as a private citizen.
Now You Know How to Lower Your Tax Liability from Property Sales
You won’t be able to, nor should you want to, avoid paying all capital gains tax but by using these tips, you can go a long way to keeping more of your money where it belongs… in your pockets.