Do I owe CGT?

By THIS IS MONEY
Updated:

 

I bought a run-down second house six months ago to make a profit. It is fully furnished and I pay utility bills and council tax, but it is not my principal private residence. I am hoping to sell it within the next four months. If the gain does not exceed four times the annual exemption (£32,800), then I will not have to pay any Capital Gains Tax. Is this correct? ST, Warwick.

Ian Luder, partner at Grant Thornton, replies: The tax treatment on the sale of this property will depend on your intentions when you purchased it and whether it was held as an investment, or formed part of a trade.

If the property was simply held as an investment, any gain on its sale would incur CGT. The gain would be calculated as the proceeds you receive from sale, less the amount you paid for the property when you acquired it.

You may also be able to deduct certain expenses you have incurred in improving the property and costs associated with its sale such as estate agents fees. You would not be eligible for taper relief to reduce the resultant gain because you would not have held the property for three or more years.

However, the gain could be reduced further by the annual CGT exempt amount, which is £8,200 in 2004/05. This assumes that you have not used this amount against any other gains realised in the tax year of sale.

Buying a property to renovate and sell would probably be seen as a trade. In the light of previous transactions, the Inland Revenue might well investigate this transaction.

If a profit on the sale of this property was to be treated as a personal gain subject to Capital Gains Tax, you suggest that the gain may not be chargeable if it is less than £32,800, being four times the annual exempt amount. Unfortunately, this is not the case. This confusion has probably arisen from the fact that you do not have to disclose capital disposals on your tax return, if the total proceeds from all capital disposals in that tax year do not exceed £32,800 in 2004/05, and no tax is payable on those disposals.

You should seek professional taxation advice in advance of selling this property to ensure the correct tax treatment is applied. In order to minimise any tax liability on the sale of this property, you should ensure your advisers are fully aware of the history of this property, any previous property transactions you have undertaken and any future property projects you expect to undertake.

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