Minimise CGT when you sell a property
Tax on gain
If you make a capital gain from selling a property you’ll have to pay tax on any part which isn’t covered by an exemption or relief. Capital gains tax (CGT) varies between 10% and 28% depending on whether you or your company owns the property and whether it’s residential or commercial. Your income tax rate can also be a factor. While the tax rate varies, the calculation of the gain itself is the same in all situations. However, there are some wrinkles to watch for.
Calculating the gain
In theory, calculating a capital gain is simple - it’s the difference between the cost of the property and what you sell it for. There are special rules for properties owned before March 1982 and April 1965, but apart from those the cost for CGT purposes is the price paid plus legal and agents’ fees, and any money you spent on property improvements that still exist when you sell. The sale proceeds are the price paid for the property less legal etc. fees.
Trap. When calculating a gain yourself or reporting figures to your accountant to include on your tax return, watch out for sums included in the sale proceeds which weren’t for the property.
Usually the settlement figure provided by your solicitor includes adjustments to reflect such costs as water rates, transferable boiler warranties, etc. These must be ignored and the gain worked out only on the amount paid for the property less tax-allowable costs.
Even after taking the adjustments out of the equation what’s left isn’t necessarily the proceeds figure to use in your CGT calculation as it might still include payment for other items. If you sell furnishings, e.g sofas, carpets etc., or freestanding equipment such as a washing machine or cooker that’s not built in, with the property this value must be excluded from your calculation of the capital gain.
Tip. It’s best to agree a price for the furnishings etc. with the purchaser and have it reflected in the contract. However, even if you don’t, you can attribute a reasonable part of the proceeds to them. Either way it will reduce any CGT payable. If you were to sell a second home and attribute, say, £3,000 of the proceeds to furnishings etc., you could save CGT of up to £840 (£3,000 x 28%).
Tax on furnishings etc.
The good news is that it’s very unlikely you’ll land yourself with a separate tax bill by attributing sale proceeds to furnishings etc. as the following exemptions usually prevent it:
- furniture is CGT exempt if it has an expected life of less than 50 years
- if it has a life expectancy of 50 plus years, e.g. a work of art, it’s exempt as long as the proceeds are less than £6,000; and
- machinery, e.g. a cooker, (except where it’s been used in a trade) is exempt, no matter its value (see The next step ).