CAPITAL GAINS TAX
Capital Gains are made when an asset (such as an investment property) is sold for more than it cost. Capital Losses are made when an asset is sold for less than it cost. Other types of disposal (eg.: gifts) are treated the same way by using the open market valuation. Tax is chargeable on capital gains to the extent that they are not covered by exemptions, reliefs or allowances.
REPORTING AND PAYING CAPITAL GAINS TAX
With effect from 5th April 2020, disposals made by UK residents must be reported and the tax paid within 30 days of the completion of the disposal.
PERSONS LIABLE TO CAPITAL GAINS TAX
UK residents are subject to Capital Gains Tax (CGT) on all gains in excess of the Annual Allowance.
CALCULATING CAPITAL GAINS AND LOSSES ON THE DISPOSAL OF INVESTMENT PROPERTY
The detailed calculation of the taxable Capital Gain arising on the disposal of an investment property is complex and should normally be undertaken by a suitably qualified person. Special rules apply where a transaction is not at an arms-length value.
- The cost is taken as the headline price or value plus all legal costs, stamp duty survey fees etc.
- The sale proceeds are the headline price or value less the agents fees, legal fees etc.
- Some improvement costs may be added to the cost of the asset.
- The gain is deemed to have accrued evenly over the period of ownership.
- Any gain accruing when it was your own principle private residence is exempt (Private Residence Relief).
- Where a gain is made on a property that has at any time been your principal private residence the gain accruing in a final period of up to 9 months is ignored.
- If the property has been your principal private residence and it has been let as residential accommodation, there is a further allowance, capped at the lower of £40,000 and the gain accruing while you shared the property with your tenant (Letting Relief).
- The cost is deducted from the sale proceeds, then the exempt amounts are deducted.
- Then the personal annual exempt amount is deducted.
- Capital Gains of individuals arising on the disposal of residential property (after deducting the Annual Allowance) are notionally added to the taxpayers other taxable income. To the extent that they would otherwise fall within the basic rate band they are taxable at 18% and the excess is taxable at 28%. The tax rate for gains made on the disposal of non-residential property is 10%/20%.
TREATMENT OF LOSSES ARISING ON THE DISPOSAL OF INVESTMENT PROPERTY
- Losses may be set off against gains of the same year.
- Losses may be carried forward and set off against gains of future years. They must be used at the first opportunity and before other reliefs are applied.
- Losses may NOT be carried back against the gains of an earlier year (except from the year of death).
- Special rules restrict the use of losses when they arose in a transaction involving a disposal to a connected person.
- In certain circumstances an individuals trading losses may be offset against the chargeable Capital Gains of the same year.
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