Capital gains tax on Property

Discussion in 'Finance, Property, Law' started by mraverage, Aug 5, 2005.

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  1. I recently sold a property which I had been renting out - never actually lived in it. I had assumed that because it was my one and only property I would be exempt capital gains tax but after asking the 'Inland Revenue' I was told I was. That's what you get for being honest I though as every other officer I know who has sold a house has not paid tax on it (same circumstances) - a previous boss made 100k on his gaff and pocketed the lot!!

    I asked the tax office in Cardiff to clarify and was told verbally that "the system is not set up to check - it relies on people making a capital gains declaration - very friendly tax man also added that there was no record of my original enquiry...hmmmm!!

    Does anyone know what the loophole is (if any)?
    Does anyone have a forces friendly accountant who can find said loophole?
    What's the worst they can do to me (I don't think I can get pregnant!!) :?:
  2. I would suggest an accountant is the right way to go. I am reluctant to share mine! A justification that may be applicable is that you intended to live in the house, but were unable to do so due to the constraints placed on you by your job. This is not deceitful and is not bending any truths. However if you are married with 5 kids and the propertyh is a studio flat then you cannot really say that you were inteding to live in it and it was a business venture, therefore you are liable to pay CGT. It is complicated (not my explanation, but the whole system).

    Get an accountant to untangle it all for you.
  3. BiscuitsAB

    BiscuitsAB LE Moderator

    The Proceeds from the sale of your Primary residence are not subject to CGT. if the Accomodation you are living in currently is rented then you could argue that your own property is your Primary residence. If the Capital Taxes Office accept this line of argument, then your Tax bill will be £0.00.

    If however they argue that it was a "buy to let" purchase then they will ask you for 40% of the Gain that have made, you are of course entitled to offset some of the gain using your CGT allowance which for the tax year 2005/2006 is £8500, also remember that if you are married both you and your wife each have an allowance.

    If your own property is not currently your Primary residence you can Elect to make it so. If you do this you should be able to remove the last three years of ownership from the CGT calculation. Which will mean that if you have owned the property for less than 3 year the liability should be £0.00.

    As for for Tax on rental income which you have recieved. If you let out property you can deduct certain expenses and tax allowances from your rental income to work out your taxable profit (or loss).
    The expenses you can deduct from letting income (unless it’s under the Rent a Room scheme) include:

    letting agent’s fees
    legal fees for lets of a year or less, or for renewing a lease for less than 50 years
    accountant’s fees
    buildings and contents insurance
    interest on property loans
    maintenance and repairs (but not improvements)
    utility bills (like gas, water, electricity)
    rent, ground rent, service charges
    Council Tax
    services you pay for, like cleaning or gardening
    other direct costs of letting the property, like phone calls, stationery, advertising
    If your annual income from the letting is less than £15,000 (before you’ve taken off expenses) you include the total expenses on your tax return; if it’s £15,000 or over you need to provide a breakdown.

    Bear in mind that you can only claim expenses that are solely for running your property letting business. If the expense is only partly for running your business (or if you use the property yourself) then you may only be able to claim part of it.

    When you work out your profit, you can’t deduct:

    ‘capital’ costs, like furniture or the property itself
    personal expenses – costs that aren’t to do with your letting business
    any loss you make when you sell the property
    But you may be able to claim some allowances instead.

    There are different types of allowance you may be able to claim for your capital costs. Capital costs include expenditure you make on assets like furniture and machinery. The allowances you can claim for some of your capital costs vary according to the type of letting.

    UK and overseas furnished residential lettings
    For furniture and equipment provided with a furnished residential letting (excluding UK furnished holiday lettings) you can claim a 'wear and tear' allowance. The allowance is 10 per cent of the 'net rent' - this being the rent received less any costs you pay that a tenant would usually pay.

    As an alternative to the wear and tear allowance, you can claim a 'renewals' allowance. This covers the cost of replacing furniture or equipment, including small items like cutlery. To work it out, take the cost of the replacement item and deduct from it:

    the amount you sold the old one for (if you got anything for it)
    anything extra you paid for a better one
    Once you've chosen which of these allowances to claim for a property, you can't switch between them from year to year.

    As for how you pay the Tax.

    If you're employed, and your taxable income from property letting is less than £2,500, your Pay As You Earn (PAYE) tax code can be adjusted to collect the tax on your property income each year. Just ask your Tax Office to send you form P810 to report your income each year. Contact details for your Tax Office are on your payslips or you can find them online, or even the Regimental pay office. Anymore than that and you will have to complete a self assesment tax form.

    Now as for getting advice on this, Estate agents know jack s***. Solicitors know even less. If you are letting through a lettings agency they may be able to help, if not an Accountant will or (and) an Independant Financial Advisor. Bear in mind the last two will charge you a fee for their time
  4. How much was the overall gain? When did you buy the property (you do get an allowance for inflation called indexation allowance if you bought it pre '98, something else not as generous now)? What were the costs associated with buying the property eg solicitors fees, stamp duty etc? What were the costs associated with selling the property eg estate agents fees etc? Did you spend money enhancing (not maintaining) the property eg an extension?

    I realise you may not want to put all this on a public forum, but by the time you'e thrown all of the above into the pot your chargeable gain may be a lot smaller than you think - when you then knock off the £8,500 each Biscuit mentions then it may well be nil, and you have nothing to worry about (BTW if your wife doesn't earn then I think you can use her income tax bands before you start paying tax at 40%)

    gives you the info from the revenue