A dirty word
Yes, we know, nobody likes paying taxes. It’s a bit of a dirty word really. However, as someone once said, there are only two things certain in life – death and taxes.
Thankfully, many of our clients do not have to pay tax when they sell. Tax is paid by anyone who holds or has held their property as an investment rather than a principle private residence.
This tax is called Capital Gains tax.
What is Capital gains tax?
Put simply, it is a tax on the profit you make. For example if you buy a property for £200,000 and sell it for £300,000, you have made a £100,000 profit. Tax will be payable on that.
However, thankfully there are allowances which are deducted from the profit. For example, in the 2020-2021 financial year, there is an allowance of £12,300 per person who owns the property. For example, if a property is owned by Mr & Mrs Bloggs, they have a combined £24,600 allowance. This is over the year so if it’s used up elsewhere, it can’t be used again.
That £100,000 profit is then reduced to £75,600 for the purposes of a capital gains tax assessment.
There are other allowances as well which can reduce the amount that tax is paid on.
Though we like to think we’re pretty clued up here at Sawyer Fielding, we’re not accountants so do advise that you take advice from someone who is suitably qualified and experienced.
What about companies?
Limited companies will pay corporation tax rather than Capital Gains tax.
What if I used to live in a property I rent out?
In most cases, the calculation to determine the profit that is taxable is relatively straightforward. The amount a property sells at minus what it was bought for minus certain allowances. However, this is complicated by the situation where someone lives in a property and subsequently rents it out. It would be unfair for HMRC to want a slice of the profit for a period of time the property had little to do with them.
As such, often a Capital Gains tax valuation report is required to determine what the Market Value was at the time it ceased being the principle private residence, normally around the same time it was first rented out. We often provide these reports for clients but do charge for them as they aren’t compensatable. All the Compulsory Purchase sale has done is bought forward when the report will be commissioned.
If you would like us to provide you with a report, click here to download our instruction form.
Our reports are compliant with the RICS Red Book and prepared by RICS Registered Valuers, giving you the peace of mind that they can be relied upon and we’re prepared to defend them if challenged by HMRC.
Though the tax may not become payable until much later (see below), getting the report done early may be a sensible idea. If you wait until much later, the report may become more expensive and if done by someone who hasn’t seen your property, may become less reliable, especially if it’s been demolished by then. It may also be more expensive. Our reports are very competitively priced because we have the benefit of seeing your property for the potential sale on Compulsory Purchase terms as well. This allows us to offer the service cheaper than competitors, passing the savings onto our clients.
What about Capital Gains tax rollover relief?
Now it gets even more interesting.
If you’re selling on Compulsory Purchase terms and are liable for Capital Gains tax, you may be able to roll it over into a replacement property.
To do this, your sale needs to be to an acquiring authority who could or have made a Compulsory Purchase Order. For example, it could be to the local council but not to a developer.
Your sale also needs to be on Compulsory Purchase terms.
If you qualify for the above, it doesn’t mean that you avoid Capital Gains tax altogether. Remember what we said earlier – there are two things certain in life – death and taxes. What it means is that you’ll be able to roll the tax into a replacement property. You won’t pay it until you sell that property on.
Your acquisition of the replacement property needs to be within one year before you sell on Compulsory Purchase terms (or lose it to the CPO) or up to three years after.
If you invest all of the sale proceeds (excluding any disturbance compensation), all of the tax will be rolled over. If you invest some of the sale proceeds, only some of the tax will be rolled over so you’ll still be paying soon after selling on the rest.
Now for the horrible bit (sorry!) – the acquisition of another property to roll the tax into does need to be held as an investment. If you use the money to buy somewhere to live in, you won’t be able to roll the tax over.
As with any taxation advice, we recommend that you consult a suitably qualified and experienced accountant. We’re pretty clued up but it’s not our area of specialism so speak with someone who knows more.
Stamp duty Land tax
This is the tax payable when you buy a property. The calculations are below –
Under Compulsory Purchase rules, disturbance compensation will cover costs such as stamp duty on a replacement property. There are however restrictions that homeowners need to be aware of.
What you buy: If you are selling somewhere that is your main home, you’re only entitled to recover costs for buying somewhere else that will be your main home. If you’re buying somewhere you rent out, you’re only entitled to recover costs for buying somewhere else that you rent out.
Where you buy: To recover, it needs to be in the UK.
Recovery is capped: Sorry, if you sell at £300,000, you can’t recover the costs for buying a £5Million pound pad somewhere else (we can all dream!). If you buy at the same price you sell at (just the purchase price element of your sale package), you’ll get every penny back. If you buy somewhere more expensive, you would have to pay the difference. If you are buying as an investment, the replacement also needs to be considered as an ‘equivalent investment property’. If it is completely different, you may find yourself unable to recover anything.
Timing: If you are buying a property as an investment (not to live in), you need to buy within a year to qualify for recovery of costs. With anyone, you should resolve the claim for compensation or refer the matter to the Lands Chamber (if possible) within six years of selling or losing your property. Failure to do this can result in your being unable to receive any compensation for stamp duty.