Capital Gains Tax (CGT)
Its important to view a range of investment guides at all stages of a property investment. CGT is payable when you dispose of an asset and make a profit on it.
Most commonly we think of disposal as being the sale of the asset, but disposal also includes:
- Gifting it
- Transferring it to someone else
- Exchanging it for something else
- Being paid on an insurance claim if it has been destroyed
(It’s worth noting here that if you transfer your investment property to your spouse, then the disposal is assumed to have taken place at the original cost and so no CGT will be payable until your spouse sells the property.)
While your main residence will escape CGT liability, investment properties will incur Capital Gains Tax. In order to calculate your CGT liability, first work out what the gross capital gain is by simply deducting the original purchase price from the sale price.
Claim your deductibles on the gross capital gain
Now comes the bit where you reduce the gain. You are allowed to deduct all of the following from the gross capital gain:
- Valuations and solicitors fees
- Estate agent fees and marketing costs
- The cost of any improvements made (not maintenance and repair costs)
- Stamp duty and VAT
This will leave you with a net amount on which CGT will be liable. However, the amount that you have to pay will further depend on your gross income (CGT is payable at the rate of either 18% or 28%) and your use of your CGT allowance (in 2016/17, for example, you are allowed to make a total capital gain of £11,100 before incurring a CGT liability).
Don’t confuse the rate you will pay on a residential property with the usual rate, there is effectively an 8% surcharge bringing the CGT up to 18% or 28%. Thanks to Evil George for that.
Claim your tax reliefs
Finally, you may also be able to take into account one of the following reliefs if it applies to you:
- Entrepreneur’s relief (if the property sold is a business asset)
- Gift hold over relief (if you are gifting a business asset)
- Business asset roll-over relief (to defer tax if you are reinvesting the proceeds of the property sale into another business asset)
My recommendation here is always, always get good advice
Speak to a financial advisor and a tax specialist before you sell the property and assess your tax position fully.
I’ve known investors who have simply sold at the wrong time of the year and incurred a huge tax bill because they didn’t ask for advice first: even delaying a sale by two or three weeks around the end of the fiscal year could save you thousands in unnecessary taxes.
A simple Strategy to consider – If you are planning on selling more than one property. Sell one in the tax year previous to April and the other in the following. So March and April you can sell two properties and claim the Capital Gains Allowance in both years.
You will also benefit from selling at the time of the spring bounce in prices as the weather heats up and people go out to find their next property.
Live with passion and fun,