Capital Gains Tax questions

conrad100

Hi, I am a financial illiterate trying to understand how capital gains tax works.

This is my understanding below which may or may not be right, I would really appreciate any advice.

Ok so you sell a property, the outstanding mortgage is deducted and you get the proceeds.

The purchase price is deducted from the proceeds and the difference is the capital gain.

The annual £10,600 exemption is deducted from the capital gain. If your capital gain is less than £10,600 then there is zero CG tax. If you are not a higher rate tax payer you pay at 18% on gains after the exemption has been applied. If you are a higher rate tax payer then you pay at 28%.

Have I got the right idea her?

Also, a stupid question maybe but the same gains that you get from selling a property are not also treated as income and added to your taxable income are they? If this was so, then the gains added to your income could put people in higher rate tax bracket so that they paid CGT at the 28% rate. It would be like taxing someone twice which doesn't seem right, but I would just like to confirm that this isn't relevant to taxable income.

Many thanks!

chris_m

IIRC, if the house is your primary residence, or had been within the previous three/five(?) years, it's CGT exempt anyway.

conrad100

The property would not be a primary residence unfortunately.

Have I understood CGT correctly? Is it correct that there are no taxable income implications correctly from sale proceeds?

00ec25

conrad100 wrote: »

The property would not be a primary residence unfortunately.

Have I understood CGT correctly? Is it correct that there are no taxable income implications correctly from sale proceeds?

you have misunderstood a couple of key points:
a) the mortgage is irrelevant
b) the gain is indeed added to your other income but only to determine what CGT rate (18% or 28%) to use, this has nothing to do with your Income Tax rates (20% or 40%) and you are not being taxed twice, you are liable to CGT on the gain from the sale of your investment, you do NOT also pay Income Tax on this gain

So, on the basis you have never lived in the property then you are not exempt and cannot claim Private Residence Relief (PRR) and therefore nor can you claim letting relief if you have let it out.

1. Sales proceeds less costs of selling (EA fees and legal fees) = A
Original purchase price plus costs of buying (EA fees and legal fees) = B

2. Gross Capital Gain, lets call it G = A - B
The mortgage is irrelevant and is NOT icluded in the CGT calculation (but obviously still has to be repaid from the proceeds). Therefore if your mortgage is 100% (eg. you remortagaged in the "good" times) you could end up using all the proceeds to repay the mortgage in full and still have CGT to pay because your investment has gained in value

3. Taxable capital gain, lets call it T= G - £10,600 (the personal allowance using the 11/12 rate)

4. You pay tax on T if T >0 as per this example I did earlier today

CLAPTON

00ec25 wrote: »

you have misunderstood a couple of key points:
a) the mortgage is irrelevant
b) the gain is indeed added to your other income to determine what rate (18% or 28%) to use.

So, on the basis you have NEVER lived in the property then you are not exempt and cannot claim Private Residence Relief (PRR) and therefore nor can you claim letting relief.

1. Sales proceeds less costs of selling (EA fees and legal fees) = A
Original purchase price plus costs of buying (EA fees and legal fees) = B

2. Gross Capital Gain, lets call it G = A - B
The mortgage is irrelevant and is NOT icluded in the CGT calculation (but obviously still has to be repaid from the proceeds). Therefore if your mortgage is 100% (ie you remortagaged in the "good" times) you could end up using all the proceeds to repay the mortgage in full and still have tax to pay

3. Taxable capital gain, lets call it T= G - £10,600 (the personal allowance using the 11/12 rate)

4. You pay tax on T if T >10,600 as per this example I did earlier today

you accidentlay said that tax is based on T>10,600 where you meant tax if T>0

00ec25

CLAPTON wrote: »

you accidentlay said that tax is based on T>10,600 where you meant tax if T>0

ooops, now corrected