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Sam
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What to include for calculating Capital Gains Tax on sale of

Resolved Question:

What to include for calculating Capital Gains Tax on sale of our second home?

We lived in the flat for 6 years after purchase, since then it has been let out for the past 17 years.
Can we deduct the following expenses from the sale price and then calculate CGT on the remaining funds?

Original property purchase price + purchase Solicitors fees
Improvement costs in order to let in 1993
Total refurbishment cost in order to sell in 2014
HMRC Capital gains allowances for 2013/14
Estate Agents fees
Solicitors fees

After paying CGT, with what ever is left we have to pay our existing mortgage where we currently live?

Thanks
Submitted: 3 years ago.
Category: Tax
Expert:  Sam replied 3 years ago.
Hi

Thanks for your question. I am Sam and I am one of the UK tax experts here on Just Answer.

From the sale price, you can deduct the purchase price of the property, and all the costs associated with the purchase and sale, such as legal and estate agent fees, stamp duty, etc.
You can also deduct the costs for any capital improvements - this would mean costs such as a new bathroom or kitchen, or a conservatory, but not general improvements - which may be the case when you refer to improvements to get the property read to let or to sell.

Then you have considerations for certain reliefs because this was once your main residence AND you let the property out.
So of the 23 years of ownership - the 6 you lived there plus the last 18 months of ownership are covered by private residence relief, PLUS you are entitled to private lettings relief, which can allow up to a further £40,000 exemption. (as I assume all rental income was declared to HMRC)
If we assume the gain (after all costs have been deducted) is £100,000
then you would have private residence relief of
7.5/23 x £100,000 = £32,609 private residence relief
This leaves a gain of £67,931

Then you have the private lettings relief - which is the lesser of
1) The amount of gain on which private residence relief is due - which in this example is £32,609
2) The amount of gain left over after private residence relief has been applied, and in this example is £67,391 OR
3) £40,000

As the lesser amount is 1)The amount of gain on which private residence relief is due - which in this example is £32,609
Then this figure is deducted from the remaining gain - so £67,391 less £32,609 private lettings relief = £34,782 gain remaining

You do not indicate whether this property was held in joint names, but if it was, then each of you have private lettings relief - so this would then reduce the gain down to £2173

Then you have the annual exemption allowance of £11,000 (and gain you each have this if the property was in joint names)

So if in your sole name you will have a taxable gain of £23,782 to consider but if in joint names No capital gains tax to pay.

You should alert HMRC of the sale, so they know to expect a capital gain declaration, which you must make even if there is no capital gains to pay. (plus then they know to not expect a future declaration for rental income)

The mortgage you have outstanding has no bearing on the capital gain position, as you are already given credit for the full purchase price

Do feel free to ask for any clarification on the above.


Thanks

Sam







Customer: replied 3 years ago.

Sam


Thanks for the excellent reply.


Questions, please answer


We still have a mortgage on the sale premises, can this be deducted as expenses?


We have only declared Rents to HMRC since 2011


The property is in joint names, myself and my wife


Is there a HMRC form for completion or just an account statement would suffice?


Thanks


 


Roy

Expert:  Sam replied 3 years ago.
Hi Roy


You are very welcome

No the mortgage cannot be deducted as an expense (advised above) as you get the credit for the house purchase from the sale price.

You should have been declaring rents for all the years - and this is something you will need to rectify with HMRC - so you are entitled to the private lettings relief. This may cause tax to be due, and interest due to late payments and penalties for late income declaration and tax returns. But its important you put this right (even if there was very little tax liability arising) However it maybe that you advised HMRC the date the letting began and they decided just to ask for a submission of the rental income position from 2011, in which case, you need do no more.

As the property is in joint names, then you get one private residence relief, and then each get the private lettings relief, which renders a gain of £2173 left - between you - and as you can have £11,000 each capital gain, have no capital gain tax to pay,

The declaration for capital gains is made on the self assessment tax return - and I assume you are already both completing this to declare rental income, so you just add in the capital gain section (if you file online) if you compete the paper return then you will need to request that section to be issued to you along with the main tax return.

If you do not complete self assessment - then you need to alert HMRC of the need for you to do so for the year end 05/04/2015 (if the sale took place after 05/04/2014)
If the sale took place before 05/04/2014 - then this will apply for the tax return for year end 2013/2014, and you should get in touch with HMRC as soon as possible, as these tax returns have already been selected and issued - so HMRC will have to arrange an issue for you.


Let me know if you wish any clarification on the above, but if you could rate the level of service I have provided, it would be appreciated, as this ensures I a credited for my time.

Thanks

Sam
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