CGT payable on sale of investment property...

oddcat

My neighbour is a widow in her early 70’s and owns an unoccupied investment property that she bought in the 1970’s for £10,000 but which is now worth £140,000. She has one son in his 40’s who lives with her. She has total income of around £10,000 most of which is within her personal allowance so she has only a very small “taxable” income of around £1,000.

She now wishes to sell the property. This will create a capital gain of around £125,000 after deducting sale costs and original purchase cost.

As I understand it, this £125,000 gain must be added to her ‘taxable’income and the rate of Capital Gains Tax payable will be calculated as around £35,000 @ 18%, and £90,000 @ 28% (total tax circa £33,000) as, when the wholegain is added to income, she is (theoretically) a higher rate taxpayer for the lion’s share of the gain hence rate of 28%.

Moving into the property is not an option for her.

Questions :

1. Is the above tax calculation about right ?
2. Is there any (legitimate) way to mitigate the tax ?

Thanks

jimmo

The only thing you seem to have wrong is that the Capital Gain is calculated by reference to the open market value of the property at 31 March 1982, not the original purchase price.

http://www.hmrc.gov.uk/manuals/cgmanual/cg16702.htm

That, I am afraid, means that your neighbour will need to establish the 31 March 1982 value. However, can we check the details first?

1) Did your neighbour buy the property herself in the 1970s?

2) Did she buy it jointly with her late husband?

If so, she originally bought a half share and inherited the other half when her husband died.

3) Did her late husband buy the property in his own name?

If so, she will have inherited it when her husband died.

Each possibility produces different valuation requirements and if 2) or 3) apply it would be helpful to know when her husband died.

The most common methods of mitigation require planning and action in advance.

If you neighbour wants to sell the property now it is probably too late to mitigate.

real1314

I *think* there's also an indexation allowance; and that the 1982 valuation is an option (that usually turns out favourable).

You'd need the indexation figures for the relevant years to accurately asses the tax due. :cool:

oddcat

Thanks for the responses. Very useful.

Jimmo - I'll find out the answers to your points and post again.

Thanks again

Oddcat

macman

Don't forget that she has an annual CGT allowance of £10,600 in this tax year.