You are here > Case Studies > Tax and Vat > Capital Gains Tax Case Study
Tax & Vat
The tenants moved out of the property causing some damage. The owner then decided to carry out a comprehensive redevelopment of the property. The property had been empty for over five years and works had ground to halt.
The Empty Property Officer met with the owner to discuss his options, including:
- Complete the renovation of the property
- Rent or Sell the property on completion of the work or
- Sell the property in its current condition.
The owners Capital Gains Tax liability was not as bad as he first thought (Please see example below).
On the basis of the information provided, the owner contacted an accountant who confirmed he would have no CGT liability. The owner then marketed the property and sold it to a local developer.
The developer completely refurbished the property within a few months and has now rented the property to a local family, provided much needed accommodation to the area.
Worked Example
What is Capital gain?A capital gain is the profit arising on the disposal, in whole or part ,of an asset.
James bought a property in 1990 for £100,000 and used it as his main residence until 1994, where he then rented out the property for a year. The property suffered significant damage as a result of the tenants and has therefore remained empty until 2000., when James sold it for £200,000.
What are his liabilities
Total Gain £200,000 - £100,000 = £100,000 – ownership 10 years.
Everyone has a CGT annual allowance (currently £10,100), which James can use to offset against his profit (Assuming that he hasn’t had any other CGT gains)
Therefore, Taxable Gain £100,000 - £10,100 = £89,900
James lived in the property for 4 out of the 10 years, so 4/10 of the gain is exempt as it was his principle home
In addition, as the property was his principal home, he was eligible for “principal private residence relief”, so that the final 3 years of ownership are also exempt, 3/10 of the gain.
Therefore, 7/10 of the gain is exempt as a result of the above reliefs.
He also rented the property out for a year and therefore James is entitled to another relief called “private letting relief”: Which is the lowest of:
- The amount of gain already exempted under Principal Private residence relief,
- The gain arising as a consequence of the letting, and
- £40,000
Summary
| Capital gain from sale | £100,000 |
| Annual exemption | -£10,000 |
| Taxable Gain | £89,900 |
| Principle home exemption&Principal private residence 7/10th | -£62,930 |
| Private Letting Relief up to £40K | - £26,970 (£89,900 - £62,930) |
Capital Gains Tax Liability £0
Therefore, James would have no Capital Gains Tax liability on the sale of his property.
Note
CGT as of June 2010 is charged at 28% for high earners and 18% for basic tax payers. However, an individual’s capital gain will be added to their income, when assessing whether they remain a basic rate tax payer for the purpose of CGT.
You must in all cases seek your own independent legal and tax advice from HM Revenue&Customs or other suitably qualified person. The Council /Officer will not be held responsible for any guidance or advice given in respect of legal or financial matters. The case studies specified on this website are for illustrative purposes only.
