Capital Gains Tax – how this affects property investments

Before I write this section I want to declare that I am not an accountant, so if you need expert advice on Capital Gains Tax you should seek professional advice from an accountant. However I do broadly understand how capital gains tax works and the summary below is my understanding only.

Capital Gains Tax (CGT) - Basically what this means is that when an individual sells a property and makes a profit he/she will be liable for CGT.

The good news (if there is some!) is that every UK individual has a Capital Gains Tax (CGT) allowance each year. This is £9,200 for the 07/08 tax year. So you get the first £9,200 free from CGT. All rental property is liable to CGT (please note that property that you live in yourself is exempt from CGT – and there are also instances of CGT exemption for property that you may have lived in and then rented out – get an accountant’s advice for this). After the allowance any profit is subject to CGT. The level of taxation used to be linked to your personal tax level, however from April 08 the Government has simplified this to a flat 18%. This is great news if you are a 40% tax payer. The old system also rewarded an investor based on the length of time the investor has held a property (taper relief). There isn’t any taper relief any more so there is no incentive to hold property for a longer period of time to get a lower tax bill on sale. I’m not sure that this is what the Government intended but it is beneficial for property investors in that the tax is usually lower and you can sell whenever you want to.

There are items that are deductibles against CGT. The main item is capital expenditure (not accounted for in annual rental accounts). Items such as new windows, extensions and major work would come under this category. Also, other items such as solicitor fees etc… would be capital items. Again, please discuss what is allowable against CGT with you accountant.

It is worth logging capital items at the same time you do your lettings income/expenditure. Log them by property so that when you sell your property you don’t have to spend ages going through all potential capital items over a period of years.

Go to http://www.hmrc.gov.uk/ for more information on CGT.