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Capital Gains Tax & Property Sales
Introduction - the following article explores the tax issues involved, after you sell or dispose of an asset, including what is CGT, how is it calculated, reporting and record keeping. It does not purport to provide financial or tax advice, related to any individual situation. Always seek advice from a qualified tax specialist.
What is Capital Gains Tax? - Capital Gains Tax (or CGT for short) is a Government tax on profitable gain an individual makes when selling, giving away, exchanging an asset of value (usually a property). For 2008-09 there is a single rate of Capital Gains Tax of 18 per cent for individuals, trustees and personal representatives on taxable gains. Capital Gains Tax is paid by UK residents or executors or wills for a deceased person. If assets are disposed by a limited company, then CGT forms part of the total profits of the company, upon which they subsequently pay CGT. There are separate CGT rules for individuals that live and work outside of the UK.
It is prudent to calculate whether or not CGT applies to you, when you sell, give away, exchange, or dispose of all or part of an asset, where you receive a capital sum. Examples would selling a flat or home, selling some shares that have gone up in value, or an insurance payout for a damaged asset. Disposal of the asset happens when individual ceases to own it.
When Does CGT Not Apply? - there are specific exclusions set out by the Inland Revenue for situations where CGT does not apply. If the asset sold (disposed) of is less worth than £6,000 or ou sell you main home residence, CGT does not normally apply. Other asset based items where it does not apply are ISAs, PEPs, betting, lottery winnings, government gilts or money that forms part of your income for Income Tax purposes. Other situations include when an asset transfer between husband and, (in that tax year and where both parties live together), there is no Capital Gains Tax to pay. The implication of giving away valuable assets to children or sold very cheaply, may mean CGT rules should be considered. It is also to deduct a loss from an applicable asset, against a gain made on the disposal of other assets.
How is It Calculated? - the rules and rates and thresholds change year upon year, and are set by the Inland revenue. In principle though. the capital gains tax is calculated in the following way; The gain or loss for each asset that is sold or disposed of should be done separately, then the allowable expenses and reliefs should be taken off this amount. This is equal to the net gain or loss. In addition, you can take off the allowable losses brought forward from an earlier tax year, up to the value of your annual tax-free allowance (this is known as the 'Annual Exempt Amount' - currently £9,600 for 2008/9). Anything left is carried forward to next year. In other words, for the first £9,600 per individual, there is no capital gains tax to pay. All allowable loss must be declared, in order to be able to apply them to the calculation. In practice, this is done via the your Self Assessment tax form.
How to Report CGT? - individuals must declare report and pay their capital gains tax before 31 January, after the end of each tax year. For example, CGT linked to a gain accrued during 2008-09 must be paid by 31 January 2010. For full-time PAYE earners, author people who do not normally complete an annual self-assessment tax return form, but needs to declare a game of loss, they should telephone their local tax office to declare the gain or loss accordingly. The Self Assessment form includes a ‘notice to file’. You should ask HMRC for and complete the Capital Gains Supplementary Pages. There are strict time limits for declaring capital gain or capital loss against the disposal of an asset, and these can be found on the Inland Revenue website.
Keeping Records - for buy to let landlord investors in particular, accurate record keep is essential, following the sale of your buy to let flat or property. You should keep any information that will help to prove whether you made a loss or gain. in particular, this will include receipt of statements identifying the original cost all value of your asset. for instance, an inherited flat or home had a value at the date of the death of the person who passed on the home.
As a property investor you should keep receipts of all professional advice, fees from estate agents, Stamp Duty, searches, valuations, surveys, legal fees, Baxter transfer charges, removal van, furniture and fittings costs ( if the flat or home was let furnished). Receipts should be kept for both at the acquisition point as well as the disposal point in time. For non trade, profession or business individuals, you should keep your receipt and records, related to capital gains for at least 20 months, (following the end of the tax year in which you disposed or sold the asset).