A Guide to Property and Capital Gains Tax (UK)

The following post is NOT intended to be comprehensive financial guide, nor is it a definitive guide for calculating your tax liability on any income received from investments. This post is based upon tax avoidance, NOT tax evasion. For accurate advice regarding tax liabilities, I highly recommend you consult a Chartered Accountant or Tax Accountant and refer to the relevant website of the appropriate tax authority for the region you live in.

CGT or Capital Gains Tax is a very big consideration for budding property developers and investors. According to the website of HM Revenue & Customs:
Capital Gains Tax is a tax on the gain or profit you make when you sell, give away or otherwise dispose of something that you own, such as shares or property.

What this means, is that if you receive a lump sum from the sale of a property (for example) then you will be taxed on the difference involving the amount you paid for it and the amount it is eventually sold for. Unfortunately there are very few ways to get around this. Even if the property was given to you by a relative or left in a will, the calculation for CGT will still be based around the established market value of the property when you received it.

Even if you were to ‘gift’ the property to another party, you might still be taxed because you would be disposing of it. The logic for this is that it makes it more difficult for people to avoid being taxed. There is no end of highly ingenious ways to ‘hide’ transactions of money, carried out by far cleverer people than me. However, the person disposing of the property is being taxed on the ‘gain’, not the actual economic profit.

Even if the property you dispose of is overseas, you will still be liable for tax as soon as the money enters the UK, such as being paid into a bank account. Make no mistake, HM Revenue & Customs will leave no stone unturned if they have reason to believe you have attempted to evade CGT.

There are exemptions however. Your ‘principle and primary residence’ (your home) is exempt. Your car and any individual assets worth less than £6000 will not be taxed either should you dispose of them.
The rate of CGT that must be paid will depend upon the amount of taxable individual wages you earn. This is where the calculation gets a bit tricky because the taxable amount is charged at various rates and there is ‘Entrepreneurs Relief’ that you might qualify for.

Entrepreneur’s relief is an allowance that has conditions to satisfy before qualification can be established. For gains that qualify, a rate of 10% CGT is payable on them, instead of either 18% or 28%. There is presently a lifetime limit of £5 million for Entrepreneurs relief. The Government’s website Business Link gives the following explanation:

Entrepreneurs' Relief allows individuals and some trustees to claim relief on qualifying gains, up to a maximum lifetime limit, made on the disposal of any of the following:
• all or part of a business
• the assets of a business after it has ceased
• shares in a company
The relief applies for the years 2008-09 onwards.

Who qualifies?
The relief is available for you as an individual if you:
• are in business, for example as a sole trader or as a partner in a trading business
• hold shares in your personal trading company
The relief is also available for some trustees.
Entrepreneurs' Relief is not available for companies.

Conditions that must be met
Depending on the type of disposal, certain qualifying conditions need to be met throughout a qualifying one year period.
For example you must have owned the business during a one year period that ends:
• on the date your business was disposed of - if you are selling all or part of your business
• on the date your business ceased - if your business has ceased

How the relief works
You can make claims for Entrepreneurs' Relief on more than one occasion as long as the total qualifying gains in all your claims doesn't exceed the lifetime limit.
For 2009-10 Entrepreneurs' Relief reduces the amount of gains liable to Capital Gains Tax by four-ninths on all qualifying gains up to the maximum lifetime limit.
From 23 June 2010 the four-ninths reduction above no longer applies - instead all qualifying gains up to the maximum lifetime limit made are taxable at 10 per cent.
2009-10 example

Your business stopped trading and in July 09 you sell an asset of the trade, making a gain of £90,000.
Entrepreneurs' Relief reduces the gain liable to Capital Gains Tax by four-ninths. Four-ninths of the £90,000 gain is £40,000 (£90,000 × 4/9 = £40,000).
You must work out the Capital Gains Tax due on the remaining gain of £50,000 (£90,000 − £40,000 = £50,000).
Http://www.Businesslink.Gov.Uk

If you run your property venture as a company, not as a private individual, there might be advantages if you are a top rate taxpayer. This is because although your company will be accountable for CGT when selling an asset, the net profit you make will be subject to Corporation tax instead than Income Tax. Corporation tax is currently charged at a lower rate (20% providing the profits do not exceed £300,000) than that of the upper rate of income tax (40%).