Quick Capt Gains Tax Q - how/when is it calc'd?

Nail_Lad

I own a small property worth about 90k that I bought in 2000. I only lived there for 3 months before moving out and I've rented it to the same tenant ever since. During this time I held only a standard mortgage on the property until last year when I opted for a proper buy to let mortgage. The net profit from the rent since 2000 has been approximately £70 a month after insurances and the mortgage payment and I was always told self assessment wasn't required and I could continue on PAYE through my employer.

I'm now in a position where I would like to sell the property and realise the approximate 40k equity thats in it. The main question I have is would I be liable to capital gains tax? If so how is this calculated and who's responsibility is it to inform the inland revenue? Is the solicitor used obliged to inform the inland revenue that a property sale is liable for capital gains and if so how do they prove you weren't a resident in the property at the time? Also would this have any effect on my years of being on PAYE?

Twopints

Nail_Lad wrote:

The net profit from the rent since 2000 has been approximately £70 a month after insurances and the mortgage payment and I was always told self assessment wasn't required and I could continue on PAYE through my employer.

Who told you this? I believe that rental income (or rather the net of income less expenses) is subject to Income Tax. Have you paid tax on any of this ? You could be liable for this (£70 x 12m x 6 yrs = £5040 @ your highest rate of income tax) and it may be picked up when you sell. How are you calculating "profit" - have you allowed for all expenses ? If not you can claim for wear and tear, either based on actual expenses or at 10% of the gross rental. Sorry - don't mean to worry you!

Capital Gains Tax - almost certainly yes you would be liable but there are various allowances including your personal allowance of £8800. You can also deduct "allowable costs" i.e. selling and buying costs (estate agents, stamp duty, solicitors etc.) If this is the only property you own you may be able to argue it is your "Principle Private Residence" but I don't think so as you have not lived in it.

This guide may help: Capital Gains Tax

Please note I am not an expert on this and am going from personal experience on a sale several years ago.

It is the individual's responsibility to declare any tax liability.

bs0u0128

not to mention interest on anything owed plus fines if they find you havent declared!

silvercar

two things are separate.

income tax

should have been declared each year on your tax return. PAYE only covers your employment. only the interest elelment of the mortgage payment is tax deductable, the capital isn't 10% wear and tear allowance if it is furnished. insurance costs etc allowable. included in your total income for the relevent year and taxed at your marginal rate.

capital gains tax

liability occurs when you sell the property and is paid (after being declared on your tax return) by 31 January the year after the end of the tax year.

if you ever lived in your property as your principal private residence you get exemption for the time it was your PPR and the last 3 years of ownership. So based on your dates you will get exemption for about half of the gain. additionally you get letting relief of upto £40,000 and there is a CGT allowance of £8,800. letting relief is only available if you let a property that was your PPR. So it looks like you will have no CGT to pay.

you should still include it in your tax return of the year in question. the inland revenue will definitely notice a change in ownership registered at land registry. as there is no tax to pay there is no harm in notifying it.

As for the previous undeclared rental income either come clean now and risk fines or hope that it never comes to light. I would go through your figures again and see if that £70 per month profit can be reduced if so you could at least claim that you didn't realise that you needed to declare something that wasn't making you any profit. I seem to recall that you can only be charged fines if you didn't pay the tax when due, not sure on this point. if you didn't receive a tax return and didn't declare for that reason you have more chance of getting away with it than if you completed a tax return and didn't include all your income.

if you were still continueing letting the property I would say you need to bite the bullet and sort out your tax. As you are selling up, only you can decide if it is best to let sleeping dogs lie.

Nail_Lad

Excellent advice everyone thank you.

In all likelihood I'll revisit the accounts concerning the rent and the mortgage payment for the period and adjust accordingly allowing for expenses etc.

Based on the info provided here I'll also follow the correct path as I don't want to stray outside the law and appreciate that ignorance isn't an excuse!

Thanks for your help