CGT workings out!

richy10

I know I sound a little dumb but could you explain the above, regarding mortgate is irelevant? I cannot get it through to my thick head that the mortgate is 125k and i would sell a flat for this figure too and pay the mortgage off. Obviuosly this leaves another dwelling lets say tha could be sold at 125k too. Help an early bird who cant sleep due to figures going round my head!!!

Rich

CLAPTON

Obviously a mortgage is a very important thing to you but what silvercar means is that it doesn't affect the CGT calculation.

So you bought the property for 145k and converted to two flats lets say at half the price each so you would pay tax based on

selling price 125k
buying price = half of (buying price 145k plus costs 20k = 165k) i.e. 82.5k

so gain is 42.5k but less your CGT allowance of 9,200 means you're taxed on 33.3K.

Your mortgage doesn't come into the taxman's calculation.


If you sell the second one next year you do a similar calculation (obviously using the new tax rules ) and again the mortgage doesn't form part of the calculation

silvercar

If this is giving you sleepless nights, why not employ an accountant to advise you? A couple of hundred pounds and you know you will get professional advice rather than my snippets of info.

Not meaning to sound condesending, but I have no idea of your prior knowledge, so I'm going back to basics here. Clearly you have seen an opportunity and stand to make good money out of it.

You have to separate that tax situation from your cash flow. Tax only forms part of your business decisions. From my previous posts, the smallest tax liability would be if you sold one property April 2008 and one April 2009. You then need to consider what you will do with the properties between now and then. Renting them out on ASTs would bring in some income but you will then have to be a landlord, a burden you may or may not want. Leaving the latter one empty will not help the sale of the first. Also timing is everything, only you can judge when you will get the best price. There is no point having to lose thousands on the sale price to save a few hundred pounds in tax.

For CGT purposes, your gain on one flat is £42,500 ie your sale price less half the purchase price of the 2 flats and half the costs. Under the new tax rules that would mean a tax bill of £4,338. The following tax year you sell the second flat and have another CGT bill of £4,338. (As in my earlier post.)

In cash flow terms, you could pay off your £125k mortgage from the proceeds of the sale of the first flat and then sell the second flat and put that money in your pocket. Or you could pay off part of the mortgage and keep some cash from the sale of the first flat and pay off the remainder of the mortgage when the second flat is sold.

Your decisions on your mortgage make no difference to the CGT calculation.

Further info (only read with a stiff drink!)

If you do let one/ both of the properties, the mortgage interest would be an allowable expense against the rental income ie it would help reduce the income tax you would pay on your rental income. It MAY be in your interest to keep the mortgage going, at least in part, if you are going to rent out the flats.

You have done this buy/ sell as a one-off and the revenue will probably accept it as such. If you repeat this the revenue may well consider that this is a "trade" and subject you to the harsher tax treatment of expecting income tax to be paid on the "business" profits you generate.