When is the right time to sell your investment property?
4th November, 20140 Comments
Written by: Hoffman & Cohen
Tax payers usually don’t ask this question from their accountants, assuming the accountant should be notified once the capital gains have been realised. Also the right time to sell your investment property is usually when you get the maximum return on your investment.
However, from a tax point of view it is crucial to effectively time the disposal of your investment property that could give you a maximum of 21 months and 25 days to pay your capital gains tax liability. This means that you could earn an extra interest income on the capital gain you realised, giving you some support to pay the capital gains tax.
I have always tried to maintain simplicity by providing an example so here goes.
Mr Doe is planning to sell his investment property and hoping to realise a gain of £200,000 based on the valuation provided by a chartered surveyor and a property agent. Mr Doe is a higher rate taxpayer and has already used his annual exemption earlier this year on another disposal. Therefore he will pay capital gains tax at 28%. Mr Doe is planning to sell the property by the end of February 2015.
Option One – Sell the property as planned in February 2015
Going with this option, Mr Doe will pay a capital gains tax of £56,000 (£200,000 at 28%). The capital gains tax will need to be paid by January 2016, which will give Mr Doe 11 months to pay the £56,000. Mr Doe transferred the £200,000 to his savings account, for 10 months earning an interest of 1% per year, which provided him with interest income of £1000 after taxes.
Option Two – Sell the property after 5th of April 2015 (assuming end of April 2015)
In this option, Mr Doe will pay a capital gains tax of £52,892 (£200,000 less 2015/16 annual exemption of £11,100. Therefore capital gains tax at 28% of £188,900). The capital gains tax will need to be paid by 31st January 2017, which will give Mr Doe 21 months to pay the £52,892. Mr Doe transferred the £200,000 to his savings account, for 20 months, earning an interest of 1% per year, which provided him with interest income of £2000 after taxes.
Tax – £56,000.
Interest earned – £1000.
Net effect – £55,000.
Tax need to be paid in 11 months.
Tax – £52,892.
Interest earned – £2000.
Net effect – £50,892.
Tax need to be paid in 21 months.
Total tax savings in option two – £4108 plus an extra 11 months to pay.
What would you do with the extra £4108?
Please note: This doesn’t not constitute as tax advice. Professional advice must be sought before any tax planning. The tax planning may differ based on your individual circumstances.
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