When you sell a property that you bought to let out, you may dread the large tax bill that must surely arise on the profit. It is true that property values have increased enormously over the last few years but there are legitimate ways of reducing the tax you pay on those gains.
If you have owned the property for at least two years, taper relief will reduce the gain by 5% for each complete extra year you hold the property, until 40% of the gain is relieved. If the property has been let to a business and used in its trade, perhaps as offices or storage space, the taper relief may be higher.
Where the property was purchased before April 1998 the original cost will be increased by the indexation allowance. This takes account of the change in general prices from the date of purchase to March 1998. Further rules apply if you acquired the property before March 1982. When working out the original cost don’t forget to include the legal fees and stamp duties you paid on purchase. Also if you have made improvements to the property, the cost of which has not been set against the rents received, now would be the time to take those costs into account.
If you are married, or in a registered civil partnership, but the property is held in your sole name, you may want to consider transferring it into your joint names before sale. This may allow you both to set your annual capital gains allowance (£8,800 for 2006/07) against the gain which may reduce the taxable amount by up to £17,600. However this transfer needs to be a genuine part disposal which is documented properly.