Capital Gains Tax (CGT) is a relatively new tax, but in its 44-year lifetime it has undergone a lot of changes. What I find in my consultancy is that more and more people have to be concerned about this tax.
They are affected because they have a holiday home or rental property — at home or abroad — or they end up with their parent’s house in their names.
All of these cases mean completion of capital gains forms is a near certainty when they dispose of the property.
A brief summary of the key points of the current CGT regime:
- Gains below the annual exemption are not taxable.
- The annual exemption 2008/09 is £9,600.
- Gains above this are taxable at a flat 18%.
- No tax relief given for inflation.
- said above that gains above the exemption are taxable. But what do I mean by gains? At their simplest gains are the difference between the selling price and the cost price of the thing you sold.
You can reduce the taxable gain by deducting your selling costs (legal and estate agent) and also your buying costs (typically legal plus stamp duty.)
There is a peculiarity about CGT in that if you dispose of something over a certain value (like a house which was not home) then you have to fill in a self assessment tax return even if it turns out no CGT is payable.
The relevant sales value is four times the annual exemption. So if this year you sell a property for more than £38,400 then you will have to get in touch with HMRC. Tell them that you have sold a holiday home, rental property, investment property etc for more than £38,400 and ask them to send you a Self Assessment tax return for this year with the Capital Gains pages.
Note that the obligation to file a tax return for the year you dispose of the property is not absolved just because the tax people ignore the above request.
You have to keep on at them so that you do, in fact, end up sending in a self assessment return before the filing date.
For paper 2008/09 returns the filing date is October 31, 2009. If you fancy doing it all online then you have until January 31, 2010.
If you own a property jointly — say with your spouse or siblings — then the sales value mentioned above relates to your share.
If your share of the house sale value is below £38,400 then on that criterion you would not have to complete capital gains pages for a tax return.
Note however that if your share is worth less, but you made gains above the annual exemption of £9,600 you WILL still have to complete those pages.
There’s a good reason for this — if your gains are above that level then the only way the tax people will get their tax is after you submit a tax return.
Let’s now look at a couple of examples of cases where you would end up having to complete a tax return with capital gains pages.
Say for nursing home fees planning reasons your parents’ house was put into your name a few years back. On that date it was worth £150,000. (Transfers between family members (but not spouses) are treated as if they go at open market value.)
Now, either because your parents have died, moved into care or wish to move house, the house was sold on March 1 2009. You got £180,000 for the house after fees. You therefore made a capital gain of £30,000 on the sale.
The sale proceeds are below £38,400, but since the gain exceeds £9,600 you must tell HMRC.
Assuming you sold nothing else this year (like shares for example) then there will be a tax bill. Taking £9,600 off the gain you will be taxed on £20,400, and taxed at 18%. This means you will have a tax bill of £3,672 to pay on January 31, 2010.
You bought a holiday home in Spain, jointly with your husband, off-plan for £80,000 a few years ago. In December 2008 you sold it for £140,000.
The total gain was £60,000, which means £30,000 each. The tax on your half will be the same as for the above £30,000 gain.
You will owe £3,672 on January 31, 2010. Your husband will owe the same.
Numerate readers may note that due to having two names on the deeds some tax has been saved. Getting an extra person’s annual exemption of £9,600 saves tax at 18%. Saving is £1,728.
Your Mum died in 2007 and left you her house. For probate purposes it was valued at £200,000. Now as a result of the poor property market, you have finally sold it for £205,000 after costs.
Your capital gain is £5,000. Since this is below the annual exemption you have no CGT to pay. However the sales value of the house means you still have to complete a self assessment tax return for the year of sale.
You need to tell HMRC and ensure that you complete a return. This is frustrating when there isn’t any tax at stake, but those are the rules.
The nice thing about capital gains tax is that by taking professional advice early — and certainly well before selling the property — you can plans things, legitimately, to save a lot of tax. Once the sale has happened the tax bill is fixed. From then on the only thing which can reduce the tax is reinvestment in certain things or capital losses on other disposals.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.hustontax.com or (028) 9080-6080.