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CGT Calculation when Selling BTL Property

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turbo
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CGT Calculation when Selling BTL Property

#80317

Postby turbo » September 10th, 2017, 11:00 pm

A property bought in 2007 for £17000 is to be sold in 2017 for £22000. Could anybody explain the calculation to find out how much CGT would be due?

Is indexation and Taper Relief no longer relevant?

Alaric
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Re: CGT Calculation when Selling BTL Property

#80319

Postby Alaric » September 10th, 2017, 11:11 pm

turbo wrote:A property bought in 2007 for £17000 is to be sold in 2017 for £22000.


Isn't there a zero missing?

Any gain above the Annual Exempt Amount (AEA) of £ 11,300 is liable.

https://www.gov.uk/government/publicati ... allowances

The AEA is on all transactions, so something sold at a loss can offset the tax otherwise due.

turbo
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Re: CGT Calculation when Selling BTL Property

#80325

Postby turbo » September 11th, 2017, 12:58 am

Sorry, I missed out a zero! Purchased @ £170,000, sold @ £220,000.

Seems like a con without indexation, as the profit in real terms is not really £50,000. £170,000 in 2007 would be equivalent to a far higher value in today's terms.

If true. ii's a pity indexation and taper relief have been abolished.

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Re: CGT Calculation when Selling BTL Property

#80337

Postby Shinyuk » September 11th, 2017, 8:06 am

Have you ever lived in the property in question and rented it out also? If so, there are some significant reliefs you could claim.

turbo
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Re: CGT Calculation when Selling BTL Property

#80495

Postby turbo » September 11th, 2017, 8:23 pm

No, purely a rental property. I used thisismoney.co.uk Historic-inflation-calculator-value-money-changed-1900 calculator to work out what £170,000 would be equivalent today, and it comes out to £226,000!

So the profit on the sale of the property is £-6,000 .. ie. a loss

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Re: CGT Calculation when Selling BTL Property

#80507

Postby tieresias » September 11th, 2017, 9:17 pm

I am no expert but I believe you can, for CGT purposes, add buying expenses (stamp duty, solicitor, surveyor, refurbs) to the purchase cost, as well as any material improvements you made to the place, and deduct selling expenses (estate agent, solicitor, tarting up) from the selling price. That should reduce your CGT bill by a bit.

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Re: CGT Calculation when Selling BTL Property

#80700

Postby colin » September 12th, 2017, 6:15 pm

So the profit on the sale of the property is £-6,000 .. ie. a loss


I think buying investment property for cash is more of an income investment despite the tax to be paid on rental income, for capital gain it would have been better to use the purchase price as a number of buy to let mortgage deposits and sell once the individual deposit amounts approached the cgt limit.
Don't forget that when taper relief which was supposed to compensate for inflation was abolished the CGT rate was reduced.

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Re: CGT Calculation when Selling BTL Property

#80712

Postby JonE » September 12th, 2017, 7:36 pm

colin wrote:... for capital gain it would have been better to use the purchase price as a number of buy to let mortgage deposits and sell once the individual deposit amounts approached the cgt limit.


Eh? What is the significance of the relationship between a deposit and the CGT annual allowance (which I assume you mean by 'limit').

Leveraging one's initial capital (and any increase in equity) spreads various risks across properties and has worked well for many. Each property's capital gain on disposal is calculated without reference to whatever deposit one initially put in or whatever re-mortgaging may have taken place: it essentially looks at the difference between gross acquisition costs and net disposal proceeds (and allows for capital improvements).

Of course, by definition there's only one annual allowance p.a. so disposals would need to be spread over time if one wanted to maximise use of that allowance (though there are more significant factors that influence timing of disposals).

P'raps discussion of this would be better on the Taxes board but, as a single-shot post, I'd just comment that indexation still exists - but not for individuals. It only becomes a really significant factor if you invest long term such that periods of high inflation are covered (and note that it was never related to House Price Inflation).

Taper Relief seems to have been a bit of a political football. In '98 Brown had introduced Taper Relief to "explicitly reward long term investment" but "long term" was initially defined as 4 years for business assets and soon redefined as 2 years. Furnished Holiday Lettings qualified as a 'trade' so could receive full Taper Relief in two years rather than the ten years applicable to Residential Lettings properties. Darling later abandoned all pretence of rewarding long-term investment and explicitly rewarded short-term speculation instead: no indexation and not even a 2-year period required to hit maximum taper as the benefit was, in effect, immediately available. Great for some.

Prior to Darling's change, Taper Relief meant that a 40% taxpayer received 75% relief after just two years resulting in an effective rate of 10% and it's maintaining this 10% level that seems to have been the pivot of subsequent changes. Entrepreneurs' Relief of four-ninths meant that the 18% nominal rate became an effective rate of 10% for gains which qualified. When things subsequently changed so that this calculation wouldn't have the desired outcome it was scrapped and there was a specific 10% rate for qualifying disposals with a vastly increased ceiling.

With a difference between CGT rates and IT rates there is some incentive for inflows to be 'switched' between the regimes where possible. Why Lawson's sensible link between taxation of capital gains and of income (so the taxpayer was caught equally regardless of 'switching') was broken by Darling is totally beyond me. I sometimes idly wonder whether the oft-cited "small businessman who has spent his working life building up a business which he sells so as to enjoy the fruits of his labour in retirement" is not, in reality, the target taxpayer for whom our politicians wish to provide a "fair" system of CG taxation.

Cheers!

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Re: CGT Calculation when Selling BTL Property

#80778

Postby MyNameIsUrl » September 13th, 2017, 8:07 am

JonE wrote:Of course, by definition there's only one annual allowance p.a. so disposals would need to be spread over time if one wanted to maximise use of that allowance (though there are more significant factors that influence timing of disposals).


Would you mind giving some keywords as to what the 'more significant factors' are so that I can investigate? I had though spreading disposals one per year was the only issue.

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Re: CGT Calculation when Selling BTL Property

#80819

Postby JonE » September 13th, 2017, 10:30 am

MyNameIsUrl wrote:
JonE wrote:Of course, by definition there's only one annual allowance p.a. so disposals would need to be spread over time if one wanted to maximise use of that allowance (though there are more significant factors that influence timing of disposals).


Would you mind giving some keywords as to what the 'more significant factors' are so that I can investigate? I had though spreading disposals one per year was the only issue.


Basically, I had in mind market factors rather than tax issues. The words 'dog' and 'tax tail' spring to mind.

For example, there have been times when I felt that the market was approaching a peak and looked at selling a second property in the same tax year. There was a potential increase in net tax payable because of having just one annual exempt amount to set against total gains in the year so I'd pocket less tax-paid cash (now 8136, I believe - being 11300 less 28%). However, against that was the potential to pocket a far smaller chunk of tax-paid cash overall if I waited, missed the peak and had to cut the selling price heftily to shift it in the following tax year. Calculation of the break-even point in terms of price difference gets a bit tricksy if the property has ever been one's PPR as PPR relief and Lettings Relief become relevant to the calculation of tax-paid cash one pockets in either year.

If I believe a peak is approaching I'd rather sell in the absurd frenzy leading up to the peak (quicker and easier) than hold back in the hope that I could catch peak-price (I don't fool myself that I could do that accurately). The consequences of being too late for the peak (or being in the process as the peak passes) don't strike me as being much fun. I concede that I probably made the financial effect greater by only marketing once the last tenants had left and the place spruced-up (to ensure vacant possession and appeal to a wider market than only BTL buyers to maximise achievable price) so would also lose the rental income while the property languishes on the shelf - but the drop in achievable selling price would be the big hit for me. My BTL places were in SW London and the holiday lets in rural/coastal areas of a popular holiday destination in Devon so my general approach may not be universally appropriate as one needs to evaluate according to market conditions (both sales and lettings, the latter for future income forecasts) for the specific property types in the specific areas at the specific time.

If selling two properties as a tax year-end approaches then one could hope to arrange exchange on one before the year-end and on the other just after the year-end to pick up an annual exempt amount for each disposal - provided one is happy that the market won't suddenly collapse (or be reported as about to do so) such that buyer #2 walks away or becomes 'difficult'. I'd go for the bird in the hand if I thought the risk was unacceptably high.

There was a time when I factored-in to my planning an anticipation of re-cycling BTL properties at the 10-year point to maximise utilisation of Taper Relief (the taper didn't increase after 10 years) but that element of strategy was scuppered by abolition of Taper Relief. A docked 'tax tail' won't wag the investment 'dog'.

Cheers!

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Re: CGT Calculation when Selling BTL Property

#80823

Postby colin » September 13th, 2017, 10:58 am

Eh? What is the significance of the relationship between a deposit and the CGT annual allowance (which I assume you mean by 'limit').


The Capital Gain is the gain on the amount invested, when one borrows money the amount invested for CGT purposes becomes the deposit because the balance of the purchase is paid back to the bank. The rent being used to pay the interest and ongoing maintenance.
The maths is quite straightforward . One puts down a 10% deposit to buy one £100,000 flat, so the deposit paid is £10,000.When the flat has risen in value by 10% (£10,000) plus an amount to cover additional costs such as estate agency fees etc which are deductible as costs of disposal the flat is sold on to another investor and the bank gets its £90,000 back. The 100% capital gain on the deposit paid is £10,000 and so under the capital gain tax allowance, £11,000 is then invested in the next flat and one hopes the cgt allowance rises with house price inflation.
I am not sure what is meant by the term CGT limit it seems to imply that there is some kind of limit to how much tax has to be paid, rather there is a CGT allowance for how much gain can be made before tax is paid. In the same way there is an income tax ALLOWANCE before any income tax has to be paid. Ok to avoid CGT completely one can only sell one property per year which has risen
by an amount equal to the allowance but through purchasing a few of the smallest cheapest units available one has a chance of limiting the tax due , with higher value properties the CGT allowance can be breached withing a few months during hot periods . Over the years which the OP invested there seems to have been a queue of buy to let investors willing to buy available properties.
Small investors can use the same principle with any investment, sell before the gain really accumulates too much and re invest otherwise eventually one enters the highest tax bracket in the year the single and now very expensive asset is sold.
Unlike other assets flats and houses cannot be bought and sold in units costing a few 10s of £1000s so leverage needs to be used to diversify assets .
Of course this only pertains to the past 10 years as the tax laws are changing and to relatively small investors.

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Re: CGT Calculation when Selling BTL Property

#80862

Postby JonE » September 13th, 2017, 2:54 pm

colin wrote:
[JonE]:Eh? What is the significance of the relationship between a deposit and the CGT annual allowance (which I assume you mean by 'limit').


The Capital Gain is the gain on the amount invested, when one borrows money the amount invested for CGT purposes becomes the deposit because the balance of the purchase is paid back to the bank.


No. CGT doesn't look at whatever funding might have been used for the purchase of a capital asset or, indeed, at whatever funding has to be repaid from sale proceeds. It's simply not relevant to CGT which is a tax on gains on capital assets - regardless of associated liabilities such as mortgages. Hence my query about what you meant by " sell once the individual deposit amounts approached the cgt limit" and why you thought there to be a relationship between the two.

The 100% capital gain on the deposit paid is £10,000 and so under the capital gain tax allowance


No. The 10% capital gain on the capital asset purchased for 100k is 10k so within the 'annual exempt amount' (aka annual allowance). The Return on Capital Employed could be said to be 10k on 10k - but that's an entirely different concept and not relevant for CGT.

I am not sure what is meant by the term CGT limit


As can be seen, I was quoting you in your use of the term and explicitly making the assumption that, by it, you meant the CGT annual allowance.

Cheers!


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