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Capital gains tax - losses and deductions

We don’t always invest for yields alone; many of us buy a property with a view for selling it at a profit later on down the line. However, this means the dreaded T-word that you really don’t want to deal with – Taxes. (If any of you thought I meant ‘tenants’, you should be jolly well ashamed of yourselves.)

Capital gains tax (CGT) is payable if you make a profit on the sale of a buy to let property. It’s levied at either 18% for basic rate taxpayers or at 28% for higher rate taxpayers and trustees. A tax-free capital gains allowance, which is currently £10,900 (or £5,300 for trustees), also applies.

For example: you bought a property for £150,000 and sold it ten years later for £200,000, making a profit of £50,000. After deducting the allowance, the total taxable amount would be £39,100. Depending on your tax bracket, you’d pay either £7,038 (lower rate) or £10,948 (higher rate).

You need to declare the sale of any buy to let property on your tax return – there are extra pages on the form for this. This is true even if you haven’t made a profit, so bear that in mind.

Multiple assets

You need to work out the gain separately for each asset (a fancy word for something like a share in a company or a buy to let property) sold or disposed of in a given tax year. ‘Disposed of’ is important to include here, because if you give away or get rid of something you originally purchased instead of selling it, it is still a loss. I’ll come back to this shortly.

So if (for argument’s sake), in the same year that you made £50,000 profit on a property, you also made a separate £2,000 profit on the stock market and £15,000 loss on a second property, your total taxable capital gains for the year (after deducting the allowance) would be £26,100.

Losses in previous years

Remember when I said you need to record every single asset sold or disposed of, even if you made a loss? This is because you can offset losses made in previous years against profit made in subsequent ones.

If the year in which you made £50,000 followed a year in which you’d lost £20,000, you’d only pay capital gains tax on £19,100 of your profit. If you had lost more than £39,100 in a previous year and hadn’t yet offset it against later profits, you wouldn’t have to pay any capital gains tax at all.

The one case where this doesn’t apply is if you make a loss on the sale of your main home; this can’t be offset against profits made elsewhere.

Deductible expenses

Just as you enjoy deductions from your income tax such as general maintenance, refurbishments and agent fees (which we cover in more detail in our article on buy to let running costs), you can also offset certain costs against your capital gains tax bill. This includes money spent on buying or selling the property or adding value to it. For instance:

  • Advertising costs
  • Conveyancing fees / solicitor’s costs
  • Estate agent’s fees
  • Improvements (things that add value to the property, as opposed to general repairs and upkeep)
  • Stamp duty

So to take the above example further, you would have paid £1,500 in stamp duty and buying and selling costs (let’s say 1% of the property value each way, so £1,500 upon purchase and £2,000 upon sale). Let’s say you also spent £7,500 on a new kitchen a few years in.

This gives you a total of £12,500 in costs, which you can offset against your tax bill when you declare your profit. To revisit the first example:

£50,000 profit minus £12,500 in costs and the £10,900 allowance gives taxable gains of £26,600. At the lower rate, you’d pay £4,788; at the higher rate, you’d pay £7,448.

To be continued…

Part two of this exhilarating tax adventure, in which I’ll talk about qualifying for lettings and private residence relief, will follow next week. In the meantime, visit the HMRC website for more information on capital gains tax, and remember – if in any doubt about your tax affairs, it’s always best to speak to a qualified accountant. See our expert guide to tax for more information.

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.