Very Nice Advice

OK, so here’s the first Very Nice mini-guide to how to calculate capital gains on property. Capital gains tax is basically a tax on any profit you have made (but bear in mind that if you buy and sell lots of properties (or other assets) you’ll be seen as actually running a trading business, so business tax rates apply instead). And remember, you don’t have to do this on your own home, which you can sell free of any tax as long as it is your ‘principal primary residence’.

1. Work out what the property cost: The price you paid + any legal expenses + any other costs associated with buying it
2. Add on anything you have spent to improve its value, eg costs of building an extension
3. Take all of this away from the price you’re selling it for, and take away any selling costs (eg more legal expenses)
4. That’s your profit – or capital gain.
5. Then you can remove your annual capital gain allowance (£10,100 in 2010/11, assuming you’ve not used it on anything else) and any capital losses you might have carried forward (you’ll know if you have these), and you’re left with the taxable capital gain.
6. Multiply this by 18% (under the current rules) and that’s how much tax you have to pay.

It’s not too tricky, and here’s an example calculation:

Key points:

• Costs of improving a property do not include ongoing maintenance costs, which you should be able to offset instead against any rental income.
• You can’t accumulate your capital gain allowances over the years; if you don’t use it each year, you lose it.
• Whether or not you’ve got a mortgage on the property doesn’t make any difference to the capital gains calculation; you can’t deduct that as well!
• You report any capital gains through your self-assessment tax return; if you don’t complete a tax return then you should tell your tax office (and be mindful that if you’re renting out a property that generates rent of more than £2,500/year, you should complete a tax return anyway).

More details are available on the taxman’s website, including details of any relief for business property, and entrepreneurs. If you’re selling a property you’ve lived in at some point, and then have rented out, you may well qualify for reliefs that could reduce your tax bill. Take a look at our post here on CGT on rented homes.