Reducing the tax payable on the sale of a buy to let property

Q. I own a buy to let property in a nice location where I wouldn’t mind living, and the tenant who has been paying me rent for a number of years has decided to move on. I was considering selling the property but there is likely to be a substantial Capital Gains Tax bill to pay. Can you offer any advice as to how this could be reduced?

A. As you are considering selling the property you could, with a little patience and planning, improve the position.

As you are married then transfers of assets between husband and wife (or civil partners) are generally exempt from Capital Gains Tax. Such transfers, in your case the buy to let property, are deemed to take place at no gain or no loss.

However, there can be an interesting interaction between this relief and the well-known exemption that applies to Capital Gains made on the disposal of a principal private residence.

In your case, if you transfer your buy to let property to your wife, her acquisition and your disposal is on a no gain, no loss basis. 

Normally, the date of the acquisition of the buy to let property for tax purposes for your wife is the date of the transfer to her from you. However, in the tax rules for principal private residence relief, there is a special rule for transfers between spouses (or civil partners) of a property which is their only or main residence. This states, as in your case, that the period of ownership for your wife effectively begins with the date when you originally became the owner of the property. 

So, in your case, you could arrange to transfer this property to your wife and, providing she decides to use it as her principal private residence (you can also live there with her), she could then arrange to sell the property after a reasonable period of say 15 months. As long as this property is her principal private residence then the whole gain should be exempt from tax. For this result to apply it is important that your wife has sole (as opposed to joint) ownership of the property. 

Effectively the rules suggest that when one spouse transfers a property to the other spouse then, the ‘slate is wiped clean’ as far as previous usage of the property is concerned. Your wife will have received the property at the date of transfer, although the historical gains from the period when it was a buy to let property under your ownership, which would otherwise have been taxable at 28%, can benefit from the private residence exemption, meaning no tax to pay. Remember that for this to work it is important that the property only becomes her private residence after the transfer has been made from yourself.

As with all things tax, it does make sense to take proper advice.