Tax question – CGT

Dear Pauline,
I have a quick question on capital gains tax and was wondering if I could tap your knowledge a bit. I have a buy-to-let flat and have been having a  tenant for the past year . It’s valued at £200,000, but I have a mortgage on it of £100,000. I bought it for £50,000 in 1997. How much CGT would I have to pay if I wanted to sell it now? Will my mortgage be taken into account. Any thoughts will be useful.
Thanks in advance,

Arindam Nag

Hi Arindam, thanks for your post. 

This question will be on a number of buy-to-let investors’ minds, in light of changes made to Capital Gains Tax (CGT) in the latest budget announcement on 12 March 2008.

CGT is charged on the difference between the purchase price and sale price of any asset you sell that is worth more than £6,000. Other exemptions currently include your home and car.

Recent changes

You will have to pay tax on the gain from your buy-to-let property sale if it is worth more than you bought it for when you sell or dispose of it. For assets disposed in the current tax year (which ends on 5 April 2008), CGT is charged according to your marginal rate for income tax, so you pay as if the gain was added to your income. The tax you pay is also subject to taper relief, see yourmortgage.co.uk for more details.

But, the end of the current tax year is fast-approaching, so it’s well worth keeping the relevant information for next year in mind as well. First of all, the first £9,600 of any gain is exempt from taxation in the 2008-2009 tax year (as opposed to £9,200 up until 5 April 2008) and the current rate of CGT will be 18% regardless of your income – so you will pay a flat rate of 18% if you sell on or after 6 April 2008, rather than 10%, 20% or 40%, depending on your overall income as is currently the case.

Residency

This is all assuming that you purchased this property in order to rent it out in the first place. However, if you have lived in it at some point, there are certain forms of relief available and if you have only been renting it out for three years or less then you may be exempt from CGT altogether. You can find more information on direct.gov.uk if this is the case.

It is also possible to deduct some of the costs of buying and selling the property, including the estate agent’s and solicitor’s fees. Any capital improvement costs can be deducted too – this covers any permanent improvements to the property, such as installing central heating or double glazing, but it does not include any maintenance costs or the purchase of furniture, for example. Plus, your mortgage will not come into the equation at all, I’m afraid.

Obviously, it’s impossible to work out how much CGT you will be liable for if you sell this property until it has actually been sold. But it might be an idea to speak to a range of estate agents in the area to ascertain the potential current market value. Then you can set about working out if now is the right time to sell or not.

I would also recommend you speak to a qualified tax expert in order to get all the relevant information for your specific circumstances.

Look out for our latest online feature, scheduled for publication on Tuesday 18 March, which will examine the latest changes to CGT and the potential effect on the buy-to-let market in more detail.

Pauline McCallion is editor of Your Mortgage and Your Money magazines

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