What tax do I have to pay on sale of second property/rent income?

vincent.lee

Hello.

I'm really confused about what tax (capital gains tax?) I have to pay on a sale of a second property or rental income.

I earn £30,000 a year, and my wife earns £24,000.
We're looking to buy a home, do it up, then sell it or rent it out.

Do I get an annual tax-free allowance/Annual Exempt Amount (AEA) on the income related to the second property, despite my wife and I earning our above wages? What amount is this allowance if I get it? (is it £11,700, listed on the gov.uk site?).

I'm just not sure if this is my personal tax allowance that I'm thinking of, related to my income tax rates).

Oh, I live in Scotland, if that makes any difference.

Please help me make sense of this!

Pennywise

If your plan is to buy, renovate and sell, then it's taxed as a trade. The "profit" is added to your other income and you pay income tax and NIC on the "profit". You don't get another tax allowance.

If your plan is to buy and rent out, then it's capital gains tax when you sell. You then get your annual CGT tax allowance and pay CGT tax at the CGT tax rates. The rental income is taxed at income tax, again, no extra tax allowance, and income added to other income.

vincent.lee

Pennywise wrote: »

If your plan is to buy, renovate and sell, then it's taxed as a trade. The "profit" is added to your other income and you pay income tax and NIC on the "profit". You don't get another tax allowance.

I see. Will I then have to register as self-employed and do a self-assessment year on year?

Also, would I be able to reduce my taxable amount by using the amount I spent on renovations, estate agent fees, stamp duty, etc. as tax deductibles?

So if I received £10k profit, and renovations and sales fees cost £5k, could I then reduce my taxable amount to £5k?

Pennywise wrote: »

If your plan is to buy and rent out, then it's capital gains tax when you sell. You then get your annual CGT tax allowance and pay CGT tax at the CGT tax rates. The rental income is taxed at income tax, again, no extra tax allowance, and income added to other income.

Is there a minimum amount of time required before renting out and selling for the income to be considered as part of capital gains tax? So if I was to buy the property, rent it out of 6 months, then sell it, the income would be considered CGT, and I'd be eligible for the CGT allowance?

And again, can the taxable amount from the rental income be reduced by deducting the fees and costs of renovating and estate agents fees in renting out, making the property rentable (hard-wired detectors, EPC ratings, etc.)



Sorry about all the questions - I'm very very new at this.

Sibbers123

The best advice one could give is to see a local accountant/tax adviser. There are complex anti-avoidance rules that you are likely to fall foul of called 'transactions in land'.

The amount at stake will be significant so I would consider the accountants fee as an investment.

uknick

Regarding your 2nd set of questions, there is no minimum time before a sale could be affected by CGT. But, don't forget, it's a tax on the gain, not the proceeds. So it could well be in 6 months the gain is nil after you take off any allowable costs, allowances etc. this no CGT. And, when you say;

"So if I was to buy the property, rent it out of 6 months, then sell it, the income would be considered CGT, and I'd be eligible for the CGT allowance?"

are you referring to the sales income, not rental income? I do hope you are, or you really should go and spend an hour talking to a professional about the whole business of BLT.

Dazed_and_confused

I do hope you are, or you really should go and spend an hour talking to a professional about the whole business of BLT.

Once you've sorted your sandwiches out ask them about BTL as well :rotfl:

vincent.lee

uknick wrote: »

Regarding your 2nd set of questions, there is no minimum time before a sale could be affected by CGT. But, don't forget, it's a tax on the gain, not the proceeds. So it could well be in 6 months the gain is nil after you take off any allowable costs, allowances etc. this no CGT. And, when you say;

Yes, I'm aware it's tax on the gains - so if I bought a house for 10k, and sold it for 20k, the taxable amount would be 10k.

I'm a bit confused what costs are tax deductible though - is there a list somewhere I can see?

Also, if I to rent out the property for 6 months, would the initial purchase price and costs still be able to be deducted against the taxable amount on the final sales income once I go to sell?

uknick wrote: »

are you referring to the sales income, not rental income? I do hope you are, or you really should go and spend an hour talking to a professional about the whole business of BLT.

No, I was talking about the sales income being affected by CGT after 6 months of rental income (which would be taxed in accordance with my income tax rate).

Basically, I want to make use of the AEA on CGT - if I need to rent out for a set amount of time to have the sales income counted as CGT, then I will.

uknick

Dazed_and_confused wrote: »

Once you've sorted your sandwiches out ask them about BTL as well :rotfl:

That'll teach me for posting at lunchtime :rotfl:

uknick

vincent.lee wrote: »

Yes, I'm aware it's tax on the gains - so if I bought a house for 10k, and sold it for 20k, the taxable amount would be 10k.

I'm a bit confused what costs are tax deductible though - is there a list somewhere I can see?

Also, if I to rent out the property for 6 months, would the initial purchase price and costs still be able to be deducted against the taxable amount on the final sales income once I go to sell?



No, I was talking about the sales income being affected by CGT after 6 months of rental income (which would be taxed in accordance with my income tax rate).

Basically, I want to make use of the AEA on CGT - if I need to rent out for a set amount of time to have the sales income counted as CGT, then I will.

Allowable costs when calculating CGT

https://www.gov.uk/tax-sell-property/work-out-your-gain

You can't put rental income against CGT, completely separate taxes. What makes you think you can? And, more to the point what would the calculation be?

Are you thinking about letting relief? This is only pertinent if you've lived in the property and declared it as your main residence at some time. And before you ask how long you have to live in the property, it's not specifically defined in the tax rules. You just have to prove it was your main residence and elect it to be so. However, this could have an impact on your other residence when you come to sell it.

https://www.gov.uk/tax-sell-home/let-out-part-of-home

vincent.lee

uknick wrote: »

Allowable costs when calculating CGT

https://www.gov.uk/tax-sell-property/work-out-your-gain

You can't put rental income against CGT, completely separate taxes. What makes you think you can? And, more to the point what would the calculation be?

No, I think you're misunderstanding my question/scenario - or perhaps, I'm not explaining it well.

I don't think I can put rental income against CGT - I know it goes against my income tax. I'm asking about the sales income, once I go to sell the property AFTER the 6 months of rental income (which would be on income tax).

So am I correct in assuming that if I was to buy a property in January 2019 for £10k, then rent it out for 6 months, then sell it in June 2019 for £20k, the sales income falls under CGT, and I can still list the stamp duty, buying and selling fees, as tax deductible amounts?

uknick wrote: »

Are you thinking about letting relief? This is only pertinent if you've lived in the property and declared it as your main residence at some time. And before you ask how long you have to live in the property, it's not specifically defined in the tax rules. You just have to prove it was your main residence and elect it to be so. However, this could have an impact on your other residence when you come to sell it.

https://www.gov.uk/tax-sell-home/let-out-part-of-home

No, I'm talking about making tax deductibles on the taxable amounts from my income.

If I was to rent out the second property for 12 months, could I use the tax deductible amounts incurred from renovations, house purchasing (fees, stamp duty), and deduct them from the rental income, which would be taxed as income?

Pennywise

vincent.lee wrote: »

If I was to rent out the second property for 12 months, could I use the tax deductible amounts incurred from renovations, house purchasing (fees, stamp duty), and deduct them from the rental income, which would be taxed as income?

No, renovations, purchase/selling costs etc are capital and are deductions in the capital gains computation upon selling. They're not allowable against rental income.