| So many property investors forget about capital gains | | | | understood by considering an example. |
| tax completely, only to be reminded sharply when it | | | | Consider that you have bought a property in which |
| comes to selling their investment property. Capital gains | | | | you live for a year, before purchasing a second |
| can take a huge chunk of your profit even resulting in | | | | property; you then decide to rent your original property. |
| you failing to make any money at all. Don't be caught | | | | After a further three years, you decide to sell the |
| unaware by this tax! | | | | original property. There would, in this case, be no capital |
| Understanding CGT | | | | gains tax to pay as you were resident for the first |
| Understanding capital gains tax is not as difficult as you | | | | year and the last three years before disposal is |
| might imagine. In fact, the principles are actually quite | | | | automatically considered as a period with which it was |
| simple. Capital gains tax is paid by individuals (or | | | | your main residence. This is an important situation to |
| trustees / personal representatives). Companies do | | | | bear in mind, as many investors opt for purchasing a |
| not pay capital gains tax; however, they do pay an | | | | new property to live in, whilst they rent out the other |
| equivalent sum, under corporation tax, known as | | | | property. If you decide on this strategy, consider you |
| chargeable gains. | | | | position carefully after 3 years as, at this point, you |
| Anyone who is liable for capital gains tax must declare | | | | may find that you start losing out to capital gains tax. |
| it in their self assessment tax return. Or, if they fail to | | | | Another relief which may be of particular interest to |
| complete a self-assessment form, then the Inland | | | | property investors, is the relief that is available on |
| Revenue must be notified by the 5th October after | | | | property that has been a main residence, at some |
| the relevant tax year has ended. Any amount payable | | | | point, but has also been let out for a residential |
| to the Revenue will then normally be due by the end | | | | purpose. This relief is either £40,000 or the |
| of January of the following year. | | | | amount which is equal to the main residence fraction, |
| What is Capital Gains Tax? | | | | whichever is the lower at the time of calculation. |
| Simply put, capital gains tax is paid on any gains that | | | | Take a look at this example: |
| are made on the disposal of an asset. There are | | | | You purchase a flat for £200,000 which you |
| deductible expenses and allowances, as well as | | | | then sell for £300,000. The gain is |
| exemptions that tax payers can make the most of. | | | | £100,000. If you owned the property for 5 years |
| Any capital gain is considered as part of income. | | | | and lived in it for 1, you would have 1/5 which is liable |
| Therefore, if you are being taxed at 40 percent, you | | | | for capital gains tax and 4/5 (the first year and the last |
| will also pay capital gains, at this rate. | | | | 3) which is not. Therefore, the total exempted amount |
| Calculating Gain / Loss | | | | of the gain is £80,000 and the total taxable |
| Firstly, take the value at disposal. If the asset is being | | | | amount is £20,000. |
| given away then the current market value must be | | | | The amount of the exemption that you can claim is |
| used. From this deduct the following: | | | | the lower of £40,000 or £80,000 |
| - sales costs (this includes agents fees, advertising | | | | (exempted amount). Therefore, you can claim relief for |
| costs, solicitors' costs); | | | | £40,000. As your gain was £20,000, in this |
| - purchase costs (again including solicitors' fees); | | | | case, no tax would be payable. |
| - the purchase price or the market value at the date | | | | And that is it, for a brief and very simplified look at the |
| of purchase; if the property was purchased before 31 | | | | CGT reliefs, available on residential property. There are |
| March 1982, then you are able to use the market value | | | | a number of special rules that apply to special |
| at this date; | | | | circumstances such as agricultural residential property |
| - any taper relief that is available to take into account | | | | and a few other situations, but we won't go into them, |
| inflation; and | | | | here. |
| - the costs of any capital improvements that have | | | | The annual allowance is currently £8,800 (this is |
| been made, since you owned the property; remember, | | | | reviewed annually) per person; therefore, you can |
| the only expenditure that you can deduct is | | | | make a gain of £8,800, before you are liable for |
| expenditure that you have not deducted previously. | | | | any capital gains tax. |
| Exemptions and Allowances | | | | If you make a loss in any year this can be offset |
| A taxpayer does not have to pay capital gains on his | | | | against gains from other sources of income in that |
| or her main residence, provided that it is a permanent | | | | year, or can be offset against capital gains made in |
| residence and any periods of absence do not total | | | | future years. |
| three years. If you own more than one property then | | | | Common transactional structure that save capital gains |
| you are able to elect which property you wish to be | | | | tax |
| considered as your main residence. | | | | The transfer of assets between husband and wife is |
| Married couples are only allowed one permanent | | | | tax free. Therefore, many couples will choose to |
| residence, unless they are separated under a court | | | | transfer the asset to the individual who pays the lesser |
| order or are permanently separated. | | | | tax rate. By doing this, the person actually disposing of |
| If you have a main residence that, occasionally, has | | | | the asset can use their personal allowance and the |
| been your main residence but has also had periods | | | | remainder will be taxed at the lower income tax rate. |
| when it was rented out, or was not your main | | | | In essence, the concept of capital gains is relatively |
| residence for some other reason, then normally the | | | | simple. Despite this, many property investors forget to |
| gain must be apportioned on a time basis. There is a | | | | consider the possible implications of this tax on their |
| specific relief which allows you to consider the last 36 | | | | levels of profit. With a potential bill of 40 percent of |
| months of ownership as being a period of main | | | | any gain you have made, it is vital that you consider |
| residence, when you are doing your calculation, | | | | this tax and obtain the necessary advice, before you |
| regardless of the factual situation. | | | | get stung! |
| This may appear a little strange and is easiest | | | | |