Capital Gains and Inheritance Tax for Landlords – a Guide

For a landlord, it’s crucial to be aware of the taxes you might have to deal with, specifically Capital Gains Tax (CGT) and Inheritance Tax (IHT) upon your demise.

Before figuring out which of these taxes will apply (or in some cases, when both apply), you first must find out: do your assets or the underlying business qualify as a business asset?

(Read Time: Approx. 5 minutes)

Topics Discussed:

How Capital Gains Tax (CGT) and Inheritance Tax (IHT) for landlords impact their property businesses.
The implications and reliefs available for both CGT and IHT, and the significance of understanding the tax landscape for property investments.

The Role of Business Assets in Taxes

How your assets or the underlying businesses using those assets are categorised is crucial, particularly when aiming to achieve tax reliefs.

Historically, case law has shown that merely letting out a property doesn’t classify as a trading activity for capital taxes.

This distinction is important because trading activities can enjoy specific tax advantages.

While basic property letting is considered a business activity, many landlords go beyond this by offering extra services to their tenants.

Consider the provision of amenities in serviced offices or the addition of special facilities in rented accommodation, such as on-site laundry services.

These augmented services can change the tax dynamics of the letting activity.

An intriguing category within this realm is Furnished Holiday Letting.

These properties, often rented for short durations, emulate the characteristics of holiday homes.

From a tax perspective, they’re treated as a trade for CGT.

Companies and Capital Gains

Companies, regardless of whether they operate within the UK or overseas, are liable to pay Corporation Tax on their capital gains.

From April 2019, companies no longer need to pay the ATED CGT tax for selling UK residential properties.

This changes the tax system for such property holdings.

Additionally, companies don’t need to report under the Non-Resident CGT regime or file 60-day returns when selling these properties.

What Qualifies as Trade or Business in Property Letting?

The differentiation between what qualifies as a mere investment and what counts as a business or trade is crucial.

The key difference lies in the scale and nature of activities undertaken.

As a benchmark:

For CGT, if investment activities make up more than 20% of all activities, they are considered ‘substantial’.

For IHT, the threshold is 50%. However, this isn’t a strict percentage; it’s more about evaluating the entirety of the business operations.

A Closer Look at CGT

CGT is essentially a tax you pay on the profit you realise when you sell an asset that has increased in value.

For residential property sales, tax rates can be higher compared to non-residential properties.

From April 2023, the main rate of Corporation Tax saw an increase to 25%.

But there are several other rates and exemptions that can sometimes apply.

Companies and CGT – a Further Explanation

All companies, both resident and non-resident, are subject to Corporation Tax on their capital gains originating in the UK.

One crucial point to remember is that properties owned by companies before 31 December 2017 can benefit from Indexation, which adjusts the acquisition cost for inflation, potentially reducing the capital gain.

Reporting CGT

The process of reporting is streamlined.

For individuals under Self-Assessment, the usual deadline is the 31 January following the year of disposal. For companies, the timeline aligns with their CT600 return.

But there are special rules for certain types of sellers and properties, particularly residential ones.

For example, if an individual sells a residential property, they must declare their gains and pay the tax online within 60 days of the sale if the completion was on or after 27 October 2021.

This window was 30 days for sales completed between 6 April 2020 and 26 October 2021.

Reliefs Available for CGT

Several reliefs are designed to reduce the tax burden, depending on the nature of the asset being sold.

Some of these reliefs include Rollover Relief, Holdover Relief, and Business Asset Disposal Relief (BADR), each having its own set of conditions and qualifiers.

For ordinary property letting businesses, this relief wouldn’t apply.

However, for Furnished Holiday Lettings, it could potentially be applicable.

Inheritance Tax: Business Property Relief (BPR)

Inheritance Tax: Business Property Relief (BPR) is a significant relief for many property owners, especially when considering their estate planning.

When a person holds relevant business property at the time of their death, BPR can offer substantial tax advantages.

Notably, it’s essential to understand that companies themselves aren’t liable for Inheritance Tax (IHT).

Instead, the responsibility for IHT falls on the estates of the company’s owners, calculated based on their shareholdings in the company.

A common misconception is that all property-related businesses can access BPR.

However, the reality is different: Most standard letting activities, such as renting out residential properties, are seen predominantly as investment activities rather than genuine businesses.

Consequently, these types of activities typically don’t qualify for BPR.

However, there are exceptions. One notable example is Furnished Holiday Letting (FHL).

While still a form of letting, certain conditions surrounding FHLs can sometimes allow them to qualify for BPR.

It’s crucial to note, though, that such qualifying instances for FHLs are relatively rare, and ensuring eligibility requires careful planning and understanding of the rules.

Concluding Thoughts

Understanding the intricacies of CGT and IHT can be quite a daunting task, especially for landlords and businesses.

If there’s anything to take away, it’s that the tax landscape is ever-changing, and a good grasp on your responsibilities, as well as the potential reliefs available, can save significant sums of money.

Moreover, while the guide provides a overview, individual circumstances can greatly affect tax liabilities and reliefs.

To ensure you’re making the most of your investments and not missing out on any potential savings, don’t hesitate to get in touch with us at Tax Expert for personalised advice and guidance.

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Kind regards,

Ilyas Patel