A Guide To Capital Gains Tax

Pound coins. Capital Gains Tax: Don't Get Stung

Like anything else related to buying and selling houses, the ins and outs of capital gains tax can be... well, taxing. Find out if you should be filling in a tax return when you sell your property.

By Emma Jones

Money. Capital Gains Tax: Don't Get Stung

Is My Property Liable?

If you have a second home, a house or flat that you rent out, or a property that you are developing as an investment, any profit ('capital gain') you make when you sell will be subject to capital gains tax (CGT). If you carry out a series of developments you may be liable to pay income tax on the profit.

CGT is payable on any property other than your main residence, so even if you stay in your holiday home for a substantial amount of time every year, unless you elect that it is your principal private residence, it will be liable for CGT when you sell it on. 'This election must be made within two years of occupying the second property as a residence,' says Barry Kernon, tax consultant at HW Fisher & Company 'The election can be varied later and it is sometimes possible to benefit from the exemption on more than one property. Where a property is your principal private residence at some time during the period of ownership, the final three years of ownership are always exempt from CGT.'

Fulfil these criteria and you definitely won't pay capital gains tax on the sale of your property:

  • Throughout the period you owned it, it was your only home.
  • You did actually use it as your own home all the time you owned it.
  • Throughout the period you owned it, you only used it as a home for you and your family.
  • Your house and garden don't exceed 5,000 square metres - that's about the size of a football pitch.

If any part of your home has been used exclusively for business purposes - for example if you have used a room solely as an office for all the time you've lived there - part of the gain you make will be liable for CGT.

Paying capital gains tax is not part of the selling process, so if you think it applies to your circumstances, you will have to fill in a tax return and declare it to avoid problems at a later date. If you are in any doubt at all, contact your local tax office for the latest advice.

So How Much Will It Be?

To calculate the capital gain, you'll need to subtract the total costs, including the price that you purchased the house for, all the fees, stamp duty and agents' commission, from the proceeds of the sale. You can also subtract the cost of any major improvements, for example adding an extension. CGT will then apply to any gains over the Annual Exempt Amount (AEA), which in the 2010/2011 tax year is £10,100.

It's worth bearing in mind, however, that if you give a property away, or sell it for a low value, you may still be liable to pay tax based on the market value, not what you actually get for it.

The CGT rate is now 18% if you do not pay tax at the higher rate of 40% on your income. If you do, the CGT rate is 28%. If you are thinking of selling a property, you may want to consult an accountant to see what can be done to reduce the tax liability.

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