Cgt

moneytalks

Hi

I bought an investment property two years ago for £40000.I am considering selling for £80000.I have not had the property rented out.How much capital gains is payable if sold for £80000?Can I claim the mortgage payments incurred for last two years against cgt?

arealhighlander

If you had rented out the property then you could have used the mortgage payments as an allowable expense.

But for selling, not as far as I know. You bought for 40k you sell for 80k, you have made a 40k profit which is what you pay CGT on. You have a CGT allowance each year of about 8k so that would leave 32k to pay CGT on.

Is the house jointly owned? If so, then the profit is split between you - so 20k each, less your CGT allowance each (20-8) takes it to about 12k to pay CGT on each.

All figures rough of course.

schiff

moneytalks

A lot depends on what the property was used for during the 2 years of ownership. Can't really comment on the mortgage repayments otherwise.
But see below.

arealhighlander

I think I'm right in saying that the capital element of the mortgage repayments can never be allowed against income - for obvious reasons.
The interest element can be allowed against rents/income for the property, though it sounds at present as if no income arose during moneytalks' ownership period.
I think I'm also right in saying, if this is purely a CGT situation (ie no income from the property), that neither the capital nor the interest element of the mortgage repayments comes into the equation.

Sparky29

Am I missing something? If you have not rented it out how is it an investment property?

I rent out a property and you do take into account the interest paid on your mortgage on your self assessment but I don't think you are a landlord.

As far as I know if it is just a second home (I presume thats what you mean) and the tax man has not been involved it is just a normal house sale which does not involve CGT or everybody will pay CGT every time they moved house. Even Gordon Brown hasn't come up with that tax, YET

moneytalks

Sparky29 wrote:

Am I missing something? If you have not rented it out how is it an investment property?

I rent out a property and you do take into account the interest paid on your mortgage on your self assessment but I don't think you are a landlord.

As far as I know if it is just a second home (I presume thats what you mean) and the tax man has not been involved it is just a normal house sale which does not involve CGT or everybody will pay CGT every time they moved house. Even Gordon Brown hasn't come up with that tax, YET

So what you are saying is if a property is not rented out and you do not live in it yourself it is exempt from cgt?

Aark

As far as I know if it is just a second home (I presume thats what you mean) and the tax man has not been involved it is just a normal house sale which does not involve CGT or everybody will pay CGT every time they moved house.

Your second home is liable to Capital Gains Tax, only your Principal Private Residence is exempt.

This helpsheet gives the full details:

http://www.hmrc.gov.uk/helpsheets/ir283.pdf

I assume that by "investment property" you mean that you have never lived in the property and bought it with a view to profit from rising house prices. In this case Private Residence Relief would not apply and Capital Gains Tax would be payable.

So, worst case scenario:

Sale proceeds £80,000
Acquisition cost £40,000

Capital gain £40,000
Annual exemption £8,800 [assumed not already utilised against other gains]
Chargeable gain £31,200

Assuming you are a Higher Rate taxpayer, Capital Gains Tax of (£31,200 @ 40%) £12,480 would be due. Any of the gain which falls in your Basic Rate band is taxable at 20% instead.

However, you can reduce the capital gain by any incidental expenses of sale and acquisition (stamp duty, professional fees, valuation, advertising) and the cost of any improvements made to enhance the value of the property.

dunstonh

As far as I know if it is just a second home (I presume thats what you mean) and the tax man has not been involved it is just a normal house sale which does not involve CGT or everybody will pay CGT every time they moved house. Even Gordon Brown hasn't come up with that tax, YET

Oh dear, you are in for a bit of a shock then when it comes to selling your second property then. I hope you realise that you will be paying upto 40% tax on most of the increase in value.

and the cost of any improvements made to enhance the value of the property.

This is one for the accountants.... If the cost of the repairs, maintanance or improvements is claimed as an expense against income tax, can you still use those costs to reduce the CGT payable?

schiff

dunstonh

Seems strange being able to tell you something!

The capital element of improvements and alterations can be added to cost etc when calculating the CGT on the sale of a property. It can sometimes be a bit of a grey area though and may need negotiation with the IR. Some examples:

The cost of creating an extension/conservatory would be allowed in full.
Redecorating, new carpets, roof repairs etc wouldn't.
A new modern bathroom installation, kitchen units, central heating system - to replace old-fashioned/worn out items - you could get 60-80% allowed as the 'improvement' element depending on your negotiating skills and the mood of the IoT at the time!

Petmidget

moneytalks wrote:

Hi

I bought an investment property two years ago for £40000.I am considering selling for £80000.I have not had the property rented out.How much capital gains is payable if sold for £80000?Can I claim the mortgage payments incurred for last two years against cgt?

Piece of case this one.

So long as you do this before you sell and before you have owned property for 3 years. Get the dates checked out by accountant.

Put in an election to have the property you are selling treated as your PPR (principle private residence) Immediately it will benefit from 3 years of exempt CGT status(under final years of ownership rules), wiping out the gain totally regardles of how much. Dates are important here as their are time limits in play, so move quickly.

Sell property, the revoke the election back to your primary home. You lose the PPR for your main house for the period of the election but that cold be as short as a month, so in effect nothing.

Cook_County

Inbetween all of the typos, it sounds as if petmidget has been listening to far too many talks on tax but missed out the law behind the gossip.

One can only elect which residence is ones main residence if (and only if) both are residences.

If the second residence was never occupied as a residence then the election cannot be made.

The dodge that s/he is suggesting may work (in certain circumstances) but the facts and circumstances will need to be reviewed. The entire plan may indeed need to be disclosed on your tax return under the DOTAS (Disclosure of Tax Avoidance Schemes) rules. I would take professional advice before selling.

Petmidget

thank you pointing out the typo's i tend to touch type and dont re-read very well as i prefer to concentrate on content not grammar, not being a pendant about such things BUT.

The election can be made regardless of ACTUAL residence, hence the point of being able to make the election. Or by a awkward sod and live in it for a week. But isnt the case in question a holiday home (reading between the lines) so they have lived in it.

I would certainly advise professional advice as my proposal is not cut and dry but it is a valid tax PLANNING not an AVOIDANCE scheme. I did point that out at beginning.

Furthermore is will not need disclosure under DOTAS, unless someone cares to point out to me the DOTAS scheme number which this is covered by.

My aim is to point people in direction they should be asking their accountant about, coz best will in the word most of them are less than sparkling at this kind of thing. Which is why I earn a lot of dosh advising my clients on this kind of stuff.