Property Development Capital Gains Tax: Don't Get Stung

Date Published:

06/06/2008

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

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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).

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 declare it as your only main residence at some point during your ownership, it will be liable for CGT when you sell it on.

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

If any part of your home has been used purely 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 eligible 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 2007-2008 tax year is £9,200.

It's worth bearing in mind, however, that if you give a property away, or sell it for a low value, you'll still be liable - the tax is calculated on what it's worth, not what you actually get for it.

The taxable capital gains are then added to your taxable income, and the CGT rate is based on your income tax rate. So, until next April, this means a rate of 10 per cent, 20 per cent or 40 per cent.

From April 2008, however, things are looking slightly different. Alistair Darling has announced some major reforms to capital gains tax, including the introduction of a single rate of 18 per cent. So if you're thinking of selling before 6 April, you may want to consult an accountant now to see if it's worth hanging on until after the changes.