Don't forget about the tax
There are many things to consider when buying and selling property. One thing that is often left until the last minute or even forgotten altogether is tax.
The tax most people consider on purchasing a property is usually Stamp Duty Land Tax (SDLT). This is paid by the purchaser when buying property for more than £125,000. The Scotland Act 2012 devolved further tax raising powers to the Scottish Government and these are expected to be introduced in 2015. The plan is that SDLT in its current form will no longer apply in Scotland from April 2015 and will be replaced by a new tax on land and buildings located within the administrative boundaries of Scotland. The precise details of the new Scottish tax are still being worked out but there may be significant changes to the current system. Read more about these changes and their potential impact on the housing market.
In some cases it is appropriate to plan ahead and consider capital gains tax (CGT) as well. If the property is to be your main residence then it will usually be exempt from CGT on an eventual sale due to the tax relief on disposal of your principal private residence (PPR). PPR exemption generally applies for periods during which you owned and occupied the property. If you lived elsewhere during part of your ownership period, this can affect the availability of PPR relief on sale. It is therefore helpful to keep accurate records of any periods of non-occupation.
Purchasing an additional home?
If you are purchasing an additional home, discuss with your solicitor what your plans are for the property. Is this property for personal use, such that you have two homes and need to consider which one should be elected as your main residence for the purposes of PPR relief? Is it to be a holiday home for your sole use or use by friends and family? Is it to be let out to residential tenants? Is it to be a furnished holiday let? Is it for business use? The tax implications are different in all these scenarios and it is worth having a full discussion about this at an early stage.
Keep records to reduce CGT
Capital gains tax may also apply if you are gifting your property to a “connected party” (usually a close family member). A deemed market value is used to calculate the gain instead of actual sale proceeds. It is helpful to keep records of any capital improvement expenditure as this can be used to reduce CGT liabilities at a later date. Capital improvements go beyond repairs and maintenance to actually increasing the value of the property. If you are selling at a loss, make sure you claim the loss in the relevant tax year for CGT purposes as a tax loss can be offset against other gains to reduce your overall liability to CGT.
Margaret Ross joined Balfour+Manson’s Private Client Department in 2011. She has a particular focus on capital taxes planning and the use of trusts. Margaret is also a qualified Chartered Accountant and Chartered Tax Adviser.