October 2nd 2017

You should of course seek to minimise the amount of Capital Gains Tax that you pay when you sell a property, tax specialist Steven Turnbull takes a closer look at how to achieve this.
Steven Turnbull, JRW Tax Specialist
Capital Gains Tax (CGT) becomes payable when you sell an asset such as a business, a second property, shares or an heirloom and make money from the sale. The amount that you pay depends on your income and the asset.

Basic rate income taxpayers are liable for CGT at 10%, whilst those on higher rates of income tax pay 20% per cent. There are higher rates however for gains made on the sale of residential investment properties, and in these cases the rates can be as much as 28% for higher rate payers.

When you sell a property for more than you paid for it you may be liable to tax on any gain that you make. But as you will see, there are some elements of the sale proceeds should be ignored when working out a gain.

Tax on Gain
If you make a capital gain from selling a property then 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 is residential or commercial. Your income tax rate can also be a factor, whilst the tax rate varies, the calculation of the gain itself remains the same in all situations. However, there are some factors to watch out 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 fees and so on.

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.

Property proceeds
Usually the settlement figure provided by your solicitor includes adjustments to reflect such costs as water rates, transferable boiler warranties and so forth. These must be ignored and the gain worked out only on the amount paid for the property less tax-allowable costs.

Hidden value
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 such as sofas and carpets or freestanding equipment such as a washing machine or a cooker that’s not built in, this value must be excluded from your calculation of the capital gain.

Tax on furnishing’s
It’s best to agree a price for the furnishings 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 this will reduce any CGT payable. If you were to sell a second home and attribute £3,000 of the proceeds to furnishings, you could save CGT of up to £840 (£3,000 x 28%).

The good news is that it is very unlikely that you’ll land yourself with a separate tax bill by attributing sale proceeds to furnishings and so on 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.
•    Machinery such as a cooker, (except where it’s been used in a trade) is exempt, no matter what its value is.

Where you sell a property with furnishings or machinery, you can attribute a reasonable value to these, which can be deducted from the sale proceeds before working out the capital gain. Ideally you should agree a value with the purchaser and show it in the contract.

As with any form of taxation, the intricacies of CGT can be fairly complex and if you would like to discuss your own situation with one of our tax experts, then please get in touch with us at any of our offices.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.