Ask a planner answers: selling flats efficiently to supplement a pension fund

Monday, June 6, 2016

The question, from Ravi, 45, London

We have two flats (both mortgaged) which we are holding as our pensions for when we retire. Both flats are in my husbands name. He does a tax return self assessment every year for each flat. We propose to sell the flats to supplement our pensions (I have only been investing in a work pension for circa 10 years, my husband has had a pension for about 18 years but both pensions are worth very little). We would like to know the most tax efficient way of selling the flats to enable us to keep as much of the proceeds of each sale. We have a very small mortgage on our main residence.

The answer, from Carolyn Gowen CFPTM, Bloomsbury Wealth

Buy-to-let properties are potentially subject to capital gains tax (CGT) when sold.  Tax will be payable if the sale proceeds, less the purchase price paid for the properties, and any allowable costs incurred whilst they have been owned by you exceed the owner’s capital gains tax exemption, which is £11,000 for 2014/15.

As the properties are currently in your husband’s name, any CGT due will be payable by him.  CGT is charged at either 18% or 28% depending on the level of taxable income and other gains received during the year.

It might be worth considering transferring ownership of one of the properties to you before it is sold, as you would then be able to utilise your own capital gains tax exemption to offset against any gains on that property.  It might also reduce the rate of tax to which the gain is subject if, for example, your own income plus the remainder of the gain were lower than his in that tax year.  However, there would be legal costs involved in doing so, and you would need to weigh up whether the costs would outweigh the potential benefits in terms of tax saved.

Another option might be to stagger the sales of the properties across two tax years, so as to make use of two years’ CGT exemptions, for example selling one in 2014/15 and the second in 2015/16.

A further option would be to do both, in that you could transfer the ownership of both properties into joint names and sell one in one tax year and the other in the next.  This would allow you to use both your capital gain tax exemptions in both years, thus giving you (based on the current exemption) up to £22,000 of tax-free gain in each tax year.  The ownership need not be split equally, so you could, for example, own 75% and your husband 25% if your income were lower than his, which would bring more of any taxable gain into the name of the spouse paying a lower rate of tax.

If the total potential gains on both properties are likely to exceed your husband’s CGT exemption then I would recommend that as a first step you seek legal advice on this matter to determine the costs of changing the ownership of the properties.

Carolyn Gowen CFPTM
Bloomsbury Wealth Management