Mitigation of CGT on property - a possibility

A few of my clients have recently called me to discuss a slowly increasing concern with future property values and how their portfolio may be affected. In particular, they are becoming slowly disillusioned as to whether being heavily invested in property at the time of their retirement is the right course of action, especially with potential future increases in capital gains tax.

Business asset disposal relief

As higher rate tax payers, as these are mainly buy-to-let properties, any gains will be taxed at 28%. The question I am being asked more often than not is whether there is any planning that could be undertaken to reduce the tax burden on disposal of these properties. One consideration is whether the business asset disposal relief (BADR) could apply and if so, how? In order for BADR to be relevant, a gain must arise on the disposal of the whole or part of a trading business, or the assets used in a trading business which has ceased. As residential property letting is not a trading business, the alternative of commercial letting of furnished holiday accommodation does qualify under the BADR legislation. The conditions that must exist to qualify for furnished holiday accommodation are: - The accommodation must be furnished; - It must be let on a commercial basis with the intention of generating a profit; - It must be available for commercial letting for 210 days a year at least; - It must be actually let for at least 105 days of the year; and - The accommodation must not be let to the same individual(s) for more than a total of 155 days where the separate letting terms are more than 31 days per let. If these conditions are met for two years then the properties could be eligible for BADR and any subsequent gain could be taxed at 10%, as the rules currently stand. Clearly, whether this is a possible route will depend upon the nature and the location of the properties. However, with such websites as Airbnb and the increasing prevalence of staycations and UK city breaks, this may be easier than first imagined.

Limitations

Because of the BADR rules, multiple FHLs constitute one trade and as mentioned above, the relief will only apply on the cessation of a trade. It would be possible to turn only a proportion of the properties held into FHLs and get the relief on those, maintaining the others as a longer term investment as residential lots, thus diversifying the risk of the portfolio. There is a three-year time limit following the cessation of the FHL trade to claim the relief. Part of the advantage of this, is that letting of the FHLs need not stop completely – the trade is deemed to cease when the above criteria are not met. So there could be ongoing letting at a reduced level in this three-year period, or indeed a reversion to residential letting, bearing in mind landlord and tenant legislation and the three year time period for the relief to apply. A final point to note is that for BADR to apply, the trading business needs to have been going for two years, but the assets do not have to be owned for that period. Therefore, it would be possible to purchase further FHLs in that two-year period and the relief would still apply. Remember as well that there is no restriction for the allowance for mortgage interest on FHLs, so full deduction for any interest paid is available (subject to the mortgage company’s agreement to switch the purpose of the mortgage). There is no doubt a shift in mind-set, moving between residential lettings and furnished holiday lets, but the advantages, should there be a large potential capital gain looming, could be significant. Please contact us, should you wish to discuss this or any property related queries further.