Capital Gains Calculations & Avoiding Costly Errors
When it comes to identifying the figures to use in your capital gain calculation following the sale of a property it is not always as straightforward as it seems. What should you be including or excluding from your calculations to ensure you pay the right amount of tax?
First, what’s the gain or loss? Broadly, capital gain or loss is the difference between the cost of the property and what you sell it for, except for properties owned either before March 1982 or April 1965 where special adjustments are required. Getting to those figures requires a close study of paperwork provided by your solicitor or conveyancer.
Secondly, what about purchase cost? The cost of a property for capital gains tax purposes includes legal and other fees (such as estate agents’), Stamp Duty Land Tax in England or Land Transaction Tax in Wales. Plus, the cost of any improvements made to the property, e.g. a conservatory, but only where the improvement still exists when the property is sold. Improvements are work that goes beyond repairs and maintenance, although some major repairs might qualify as an improvement. The more improvements you can identify, the lower the gain (or greater the loss) for capital gains tax purposes.
Other factors to consider include:
- Sale proceeds is another main factor when working out a capital gain or loss. Again, this isn’t simply the price the buyer pays. You should deduct legal, agents’ fees and so on.
- For capital gains tax purposes you must ignore any adjustments your solicitor makes to the proceeds for accrued utility and other service charges. While these might reduce or increase the purchase cost or sale proceeds they aren’t relevant for capital gains tax purposes.
- If the purchase or sale of a property includes items such as furnishings, white goods etc. these too need to be ignored in your capital gains tax calculations.
- If you sell your property with furnishings, even where you haven’t specifically included a price for them in the contract, you can attribute value to them. For example, if you were to sell a second home with all the furnishings and white goods and value them at £4,000, you can knock this off the proceeds in your calculation and save yourself capital gains tax of up to £1,120 (£4,000 x 28%).
Is the sale of contents taxable? If you follow the advice here about furnishings etc. it’s unlikely it will result in a tax bill for you as furniture is capital gains tax exempt if it has an expected life of less than 50 years; and a longer life expectancy is still exempt as long as the proceeds are less than £6,000; and machinery, e.g. a cooker, etc. (except where it’s been used in a trade) is deemed always to have an expected life of less than 50 years and so exempt.
Make sure you account for legal and estate agent fees, and Stamp Duty Land Tax when working out the cost and proceeds figures for your computation. Identify the cost of any improvements you’ve made to the property. This reduces the gain. If the sale includes furnishings etc. attribute a value to them and deduct it from the sale proceeds to reduce the gain.
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For help calculating your own unique position when it comes to the sale of your property, contact our tax team who are here to help. Let’s Talk.
