Landlords may be in for a nasty capital gains tax shock when they come to sell their property
Capital gains tax is payable on the profit calculated as follows:
|Sales proceeds from sale of property||x|
|Less: costs associated with selling the property, ie. Advertising costs, estate agent fees, legal fees||(x)|
|Less: enhancement costs, ie. cost of loft conversion||(x)|
|Less initial cost of property||(x)|
|Less: costs associated with purchasing the property, ie. Advertising costs, estate agent fees, legal fees & stamp duty fees||(x)|
|Capital Gains tax profit||x|
Each taxpayer has an Annual Exemption to set against capital gains tax profits. The annual Exemption is currently £11,100 for the tax year ended 5th April 2016.
After offsetting the Annual Exemption, the remaining profit is chargeable to income tax at either 18% or 28% depending on where the profit falls within your lower or higher rate bands.
So… a higher rate taxpayer selling a buy to let property that originally cost £120,000 for £160,000 with total costs of £4,000. Has a capital gains tax profit of £36,000, which is reduced to £24,900 after his Annual Exemption, will face an income tax bill of £6,972.00. A nasty shock indeed !!