For the vast majority of people who own only one property which is there “one and main” residence, Capital Gains Tax will not be a factor. However for people who own more than one property because they have a property portfolio or are a Buy to Let Landlord, this Guidance Note should be read and understood.
1.1 Capital Gains Tax is a tax levied on the increase in value of an asset during your ownership, and is payable on the disposal of the asset. The increase in value is called “a Chargeable Gain”.
1.2 Broadly speaking you work out the value of the asset as at the date you acquire it and the value again on the date of disposal. In the case of Property, the acquisition value will be generally the price you paid for it. If you inherited the Property, the acquisition value will be the value of the property at the date of death of the previous owner ( the value for Probate purposes).
1.3 A disposal includes giving an asset away as well as selling it. If you give away Property, for Capital Gains Tax purposes, the Disposal Value is the market value of the Property at that time. Likewise for transactions where less than the full price is paid, the Disposal Value is its true market value.
1.4 A disposal of an asset to your spouse to whom you are still legally married at that date or a disposal of an asset to your Civil Partner will be an exempt disposal for Capital Gains Tax purposes.
1.5 As a result of changes announced in the 2010 Emergency Budget, Capital Gains Tax is levied at either 18% or 28% dependent on whether you are a Higher Rate Income Tax Payer. However the issue can be more complicated where the value of the net gain puts an individual in the higher rate Income Tax band. This can be shown by the following examples.
1.5.1) Mr A earns £20,000 gross per year. He sells his second home making a gain of £20,100. He can deduct his Annual Exemption for Capital Gains Tax if not used elsewhere, reducing the gain to £10,000. The £10,000 net gain is added to the £20,000 gross income- making a total of £30,000 in Income and Gain. The Gain is Taxed at 18%.
1.5.2) Mr A earns £30,000 gross per year. He sells his second home making a gain of £40,100. He can deduct his Annual Exemption for Capital Gains Tax if not used elsewhere, reducing the gain to £30,000. The £30,000 net gain is added to the £30,000 gross income- making a total of £60,000 in Income and Gain. The first £13,470.00 of the Gain is Taxed at 18%- the remainder £16,530.00 is taxed at 28%.
1.6 Every Individual has an annual allowance termed “ an Annual Exempt Amount” (AEA) which enables them to make a certain amount in chargeable gains without having to pay Capital Gains Tax. For the Tax Year 2010-11, the AEA stands at £10,100.00.
2. Capital Gains Tax on Land
2.1 As explained at the outset, CGT does not apply to a disposal of ‘your one and main residence’ This is defined to be A Property that throughout your period of ownership has been your only home and has been used as your only home Throughout your period of ownership you have not used the property for any other purpose other than as a home for yourself and no more than one lodger The house and its garden do not exceed 5,000 square meters (around 1 ¼ acres)
2.2 Even where you cannot satisfy all of these conditions throughout your ownership provided they were met for all save for a period not exceeding the last three years of ownership, you may still be able to claim, ‘One and Main Residence relief’. Likewise if you live away temporarily because of work, you may still qualify for the relief.
2.3 Where you own more than one house, you must advise HM Revenue and Customs which is your one and main residence for Capital Gains Tax purposes. The other properties will be prima facie liable for Capital Gains Tax dependent on the increase in value between your Date of Acquisition and your date of Disposal.
2.4 As explained on page 1, the figures for a CGT calculation is based upon the Value of the Property when you disposed of it and subtracting from it the Value of the Property when you had acquired it. The difference between the two values is ‘the Gain’
Note; where Property was acquired before 1st April1982, “Re-Basing Rules state that the Acquisition Value will be the value of the Property as at 31st March 1982”
You may deduct from the Gain, Firstly what are termed “Incidental Costs of Acquisition and Disposal”. These are Estate Agency costs in the finding of a Buyer on disposal. Any additional advertising costs on finding a Buyer Solicitors costs on the disposal, Solicitors costs on the acquisition, Stamp Duty Land Tax and Land Registration Fees paid on the acquisition. The costs of a valuation to calculate Acquisition and Disposal Values.
Secondly what are termed “Allowable Costs” These are for maintenance and repair of the Property for carrying out improvements costs incurred in legal disputes involving the property.
Note; The repayment of capital and interest on a mortgage during your period of ownership is NOT an allowable cost.
Thirdly what is termed Indexation, (rise in the Retail Prices Index) but here only for Property which was owned prior to April 1998. Indexation is only allowed for the period of ownership from acquisition up to 31st March 1998.
Note; What was termed Taper Relief which reduced the tax payable where Property had been owned for a long period of time has now been abolished.
2.5 Timescales for the disposal of property which has a potential liability for Capital Gains Tax are crucial.
2.5.1 For Capital Gains Tax purposes, Property is deemed to be disposed of on the Date of Exchange of Contracts. It is not the completion date. So therefore ensure that if you have used up your Annual Exempt Amount (AEA) in one financial year defer an exchange of contracts until the start of the next.
2.5.2 The Tax becomes payable only once completion has taken place.
2.5.3 You will be required to report any chargeable gains made, in the Self Assessment Tax return sent to you annually for Income Tax purposes. If you do not normally receive a Self Assessment Tax Return, then you must notify your Tax Office who will send you a form for completion. In any event any gains must be reported by 5th October following the Tax Year in which the gains arose. There are penalties for failing to report gains coupled with Interest for late payments.
2.6 ; Where you own Property jointly with another and for all owners, it is not their one and main residence, each owner is deemed to have made a disposal of their share in the Property and CGT will be based on the increase in value in their individual share during their period of ownership.
For your information, other assets upon which NO Capital Gains Tax is payable include Your Private Car Cash held in sterling Individual items such as:
- antiques which do not exceed £6,000 in value
- Savings Certificates
- Premium Bonds
- Assets held in Individual Savings Accounts (ISAs) or Personal Equity Plans (PEPs)
- UK Government Stocks
ALWAYS TAKE ADVICE FROM A SPECIALIST TAX CONSULTANT BEFORE PROCEEDING WITH BUYING AND SELLING INVESTMENT PROPERTY.
THIS GUIDANCE NOTE CONTAINS GENERAL ADVICE ONLY AND IS NOT TO BE RELIED UPON FOR PURPOSES OF CALCULATING YOUR LIKELY CAPITAL GAINS TAX LIABILITY.