Capital Gains Tax calculation.
Discussion
Can anyone confirm if I am calculating CGT correctly in the following scenario please?
An investment property was owned by a couple on a tennants in common basis. Partner 1 died and passed their half to the remaining partner, who decides to dispose of the asset a few years later. The original purchase price was £100k in 2000, the value at partner 1's death was £200k in 2006 and the value now is £150k, and there was 10k in expenses over the period of ownership. Is the following calculation correct?
Partner 1's share:
As inherited between partners, value for CGT starts at partner 1's death, ie 50% of £150k-£200k = -£25k
Partner 2's share:
Owned from outset, ie 50% of £200k-£100k = £50k
Partner 2's current CGT liability:
£50k - £25k - £10k (expenses) - £10.6k (tax free allowance) = £4.8k
So total CGT liability would be 18 or 28% of £4.8k depending on partner 2's tax rate?
An investment property was owned by a couple on a tennants in common basis. Partner 1 died and passed their half to the remaining partner, who decides to dispose of the asset a few years later. The original purchase price was £100k in 2000, the value at partner 1's death was £200k in 2006 and the value now is £150k, and there was 10k in expenses over the period of ownership. Is the following calculation correct?
Partner 1's share:
As inherited between partners, value for CGT starts at partner 1's death, ie 50% of £150k-£200k = -£25k
Partner 2's share:
Owned from outset, ie 50% of £200k-£100k = £50k
Partner 2's current CGT liability:
£50k - £25k - £10k (expenses) - £10.6k (tax free allowance) = £4.8k
So total CGT liability would be 18 or 28% of £4.8k depending on partner 2's tax rate?
sumo69 said:
So
Proceeds 150
Cost 1 -50 (half of initial 100k cost)
Cost 2 -100 (value of 50% for probate)
Other - 10
LOSS -10
So no CGT liability.
I assume the costs include agents fees, solicitors and any stamp duty on purchase which are all included in a CGT calculation?
David
Thanks David, so my maths would have been right if it wasn't for me inadvertently taking the surviving partners cost to be based on the peak price rather than the current price!Proceeds 150
Cost 1 -50 (half of initial 100k cost)
Cost 2 -100 (value of 50% for probate)
Other - 10
LOSS -10
So no CGT liability.
I assume the costs include agents fees, solicitors and any stamp duty on purchase which are all included in a CGT calculation?
David
The costs mentioned include all appropriate maintenance/fees (all numbers in the example are made up so they may not be realistic!) Given that in this example the purchase/sale values balance to zero, then I think the additional costs are pretty much irrelevant?
sumo69 said:
I assume the property was not rented that you have included the maintenance costs? Otherwise they would be set-off v rental income and not treated as a CGT cost.
As you say, in this example there is no concern as even excluding the other costs there would not be a liability.
David
Good point, how is that generally handled? I think the majority of maintenance costs were incurred at a time when no rental income was received (although the property was inhabited at that time if that makes any difference)As you say, in this example there is no concern as even excluding the other costs there would not be a liability.
David
It depends on whether those maintenance costs were booked for offset against rental income. If they were, and there was no or very little rental income, then in all likelihood there would have been a rental loss in those periods, which would have been offsetable against future rental profits. If those rental profits failed to materialise, those losses will effectively go to waste.
Thanks for the help guys, very useful.
In essence then, any costs that have been reconciled in an annual tax return can't be included in the CGT tax calc? In this situation the bulk of maintenance costs have occurred more recently, in the period with no rental income and have not been reconciled on a tax return (ie, offset against future rental)- hence they should ok to include as costs for CGT purposes?
In essence then, any costs that have been reconciled in an annual tax return can't be included in the CGT tax calc? In this situation the bulk of maintenance costs have occurred more recently, in the period with no rental income and have not been reconciled on a tax return (ie, offset against future rental)- hence they should ok to include as costs for CGT purposes?
Up to a point. CGT allows "enhancement costs" to be added to the original cost of the property thereby helping reduce the CGT profit. The rules do stipulate what they mean by "enhancement costs" as being costs that make the property better than before. Therefore, in theory, ordinary repairs and maintenance costs are not really included in the definition of enhancement costs.
In reality, the dividing line between ordinary repairs and genuine enhancements isn't always that clear cut.
In reality, the dividing line between ordinary repairs and genuine enhancements isn't always that clear cut.
Eric Mc said:
Up to a point. CGT allows "enhancement costs" to be added to the original cost of the property thereby helping reduce the CGT profit. The rules do stipulate what they mean by "enhancement costs" as being costs that make the property better than before. Therefore, in theory, ordinary repairs and maintenance costs are not really included in the definition of enhancement costs.
In reality, the dividing line between ordinary repairs and genuine enhancements isn't always that clear cut.
Ah I see! The main cost incurred is the installation of double glazing, which sounds like a fairly clear cut enhancement cost. Presumably then, the day to day costs are balanced against the rental income and the enhancement costs balanced against Capital Gains - the grey areas occurring in how any particular cost is classified.In reality, the dividing line between ordinary repairs and genuine enhancements isn't always that clear cut.
Makes a lot more sense now, thanks again for your help!
One final question though - In this calc the cost price (for CGT purposes) for the dead partners half of the property starts at the time of death (and hence transfer to the surviving partner), due to the property being held as tenants in common and there being no tax liability when passing the asset to the surviving spouse. Is it correct that the gains between initial purchase and the death are effectively "lost" - I can't spot anything obvious on the HMRC site to contradict this?
One final question though - In this calc the cost price (for CGT purposes) for the dead partners half of the property starts at the time of death (and hence transfer to the surviving partner), due to the property being held as tenants in common and there being no tax liability when passing the asset to the surviving spouse. Is it correct that the gains between initial purchase and the death are effectively "lost" - I can't spot anything obvious on the HMRC site to contradict this?
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