Capital Gains Tax

rachpach1

Hi, My hubby & I are house owners and have recently taken out another mortgage which is a buy to let mortgage for £85,000. The second property purchased has had some minor work done and is now ready for rental or selling. It is valued at £120,000 if sold now. If we decide to sell we have no fees to pay on early surrender of the mortgage which is good. However, we are concerned about capital gains tax - would we have to pay it and is there any way around it? If not, how much would we be looking at paying. We have spent around £10,000 on repairs etc. Can anyone help? Thanks.

shockingmoment

as its not your 'primary residence' then cgt is due.
however, if the property is in joint names, you do have an allowance - I believe this is £8750 each - against the capital gain.
take off any expenses incurred in the refurb (with receipts, of course) and the rest is taxable (at 40% i think)

i'm sure others will correct or modify if i've made a mistake.

hope this helps.

DavidHM

Okay...

£85k purchase cost
£10k improvements - hopefully all deductible
£95k input cost

£120k sale price

Chargeable gain = £120k - £95k = £25k

That's £12,500 each

You have an annual exemption of £8,800 each so assuming you've paid no CGT this year, you'd have a taxable gain of £3,700 each.

That would then be taxed at 20% or 40%, depending on your other income. If the £3,700 takes either of you into the higher band then the tax is split so that you pay 20% on the amount up to the threshold and the excess at 40%.

If the property is not owned by you both, it's worth transferring it so that it is and you can each benefit from your annual exemption.

RabbitMad

You also need to take into account purchase fees and sale fees (e.g. solicitors costs for both buying and selling, estate agents fees etc.)

You might also be able to take into account any mortgage fee, such as an arragement fee, interest (unless you've used this to ofset income), and any fees on completion of the mortgage (I know you've said their aren't any but most companies charge a small administration fee)

if these come to £2K for instance that is £2,700 gain each. If one of you is a lower rate tax payer or a non tax payer you can say that owneship of the property was x% to you and y% to the other. you set this percentage so that the gain is exactly the gct allowance of the person that has the most income (and therefore pays the higher rate of tax)

Doing this could reduce you tax bill from about £2,200 to £1,000 (based on a 3.7K gain each above your allowances)

Probably worth speaking to an accountant. If you have to pay them £100 for an hour of their time but save yourselves inexcess of £1,000 then that would be money well spent.

WHA

rachpach1 wrote:

Hi, My hubby & I are house owners and have recently taken out another mortgage which is a buy to let mortgage for £85,000. The second property purchased has had some minor work done and is now ready for rental or selling. It is valued at £120,000 if sold now. If we decide to sell we have no fees to pay on early surrender of the mortgage which is good. However, we are concerned about capital gains tax - would we have to pay it and is there any way around it? If not, how much would we be looking at paying. We have spent around £10,000 on repairs etc. Can anyone help? Thanks.

Be careful about selling it having not had it rented out. If you buy a property, renovate it and then sell it, instead of CGT, the HMRC could argue you were trading and charge you income tax and national insurance on your profit, so you wouldn't be able to use your annual CGT exemptions and could be paying another 9% NIC on the profit on top of the tax. That is why most serial property developers either live in or rent out the house prior to selling - that is to guarantee its capital gains tax treatment. Houses are regarded for tax no different as anything else - buy a box of Mars bars with the intention of selling them = trading and income tax, buy a house with the intention of selling = trading and income tax - you need evidence to prove your intention was long term investment rather than intending to sell it - the onus is on you to prove this, not the HMRC to prove your intention was to sell - having a BTL mortgage is a good start but not conclusive proof of intention.

RabbitMad

WHA wrote:

, buy a house with the intention of selling = trading and income tax

I would disagree buying a house, doing it up and selling will generally always be considered a capital gain. Just like buying shares with the intention of selling isn't considered trading neither are houses.