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Capital Gains Tax and Income Tax

Practical Issues
Sunnypad
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Capital Gains Tax and Income Tax

#406772

Postby Sunnypad » April 25th, 2021, 11:24 am

Hi there
Really confused how to calculate this and the gov calculator isn't helping

My mum is selling an investment flat.

She is a basic rate taxpayer so my understanding is that
She has an allowance of £12,300 on a capital gain

She will therefore pay 18% on the gain, minus the £12,300. Is this correct?

Then, the profits from the sale will go on her tax return and make her a higher rate tax payer due to the bump in income so she pays income tax on it as well?!

Thank you.

dealtn
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Re: Capital Gains Tax and Income Tax

#406774

Postby dealtn » April 25th, 2021, 11:28 am

Sunnypad wrote:Hi there
Really confused how to calculate this and the gov calculator isn't helping

My mum is selling an investment flat.

She is a basic rate taxpayer so my understanding is that
She has an allowance of £12,300 on a capital gain

She will therefore pay 18% on the gain, minus the £12,300. Is this correct?

Then, the profits from the sale will go on her tax return and make her a higher rate tax payer due to the bump in income so she pays income tax on it as well?!

Thank you.


There is no bump in income to pay income tax on.

scrumpyjack
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Re: Capital Gains Tax and Income Tax

#406778

Postby scrumpyjack » April 25th, 2021, 11:32 am

She will pay 18% on the amount of gain subject to the available basic rate band. Any gain above that will be taxed at the 28% CGT rate, not the 40% higher rate income tax.

Sunnypad
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Re: Capital Gains Tax and Income Tax

#406787

Postby Sunnypad » April 25th, 2021, 12:01 pm

Dealtn

So there's just the CGT to pay? The profit doesn't get taxed as income?

When we do her ordinary tax return, surely we list the gain. Are you saying that counts as taxed already so not subject to further tax?

Thanks.

dealtn
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Re: Capital Gains Tax and Income Tax

#406795

Postby dealtn » April 25th, 2021, 12:19 pm

Sunnypad wrote:Dealtn

So there's just the CGT to pay? The profit doesn't get taxed as income?

When we do her ordinary tax return, surely we list the gain. Are you saying that counts as taxed already so not subject to further tax?

Thanks.


The tax return covers both Income and Capital Gains Tax. Yes you will note the "gain" (actually you will note more than just that gain, you will note the purchase and sale details too - assuming its above the threshold for reporting).

You are selling an investment, which is a Capital transaction. I assume there is some profit on this, on which you will bear Capital Gains Tax, should it be above your allowance.

The sum realised isn't income. Depending on what income that investment earned, and what is happening to the proceeds, your (future) income will change, and your income tax level going forward will perhaps change with it. But that is nothing directly to do with the sale of the investment.

Sunnypad
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Re: Capital Gains Tax and Income Tax

#406805

Postby Sunnypad » April 25th, 2021, 12:47 pm

Thank you dealtn, much appreciated.

Charlottesquare
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Re: Capital Gains Tax and Income Tax

#406810

Postby Charlottesquare » April 25th, 2021, 1:26 pm

As the sale is residential property (and I am presuming it is here in the UK) then I think this falls within the newish (since April 20) 30 day reporting regime.

https://www.gov.uk/capital-gains-tax/re ... -gains-tax

https://www.tax.service.gov.uk/capital- ... 1608666430

Gengulphus
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Re: Capital Gains Tax and Income Tax

#406860

Postby Gengulphus » April 25th, 2021, 5:47 pm

Sunnypad wrote:My mum is selling an investment flat.

She is a basic rate taxpayer so my understanding is that
She has an allowance of £12,300 on a capital gain

She will therefore pay 18% on the gain, minus the £12,300. Is this correct?

Your intended meaning may be correct, but I cannot tell for certain, because "18% on the gain, minus the £12,300" can be read either as "(18% of the gain) minus £12,300", i.e. subtracting £12,300 from the tax, or as "18% of (the gain minus £12,300)", i.e. subtracting £12,300 from the gain, which is considerably less generous! So to be clear, I'm afraid the correct treatment is that less generous one: the £12,300 is to be subtracted from the gain.

In more detail, she should:

1) Calculate the gain on the flat. That is equal to the 'disposal proceeds', which are the basic amount that she sold the flat for, minus the 'allowable costs', which are:

* The acquisition cost: the basic amount she bought the flat for (or if she didn't buy it, generally its market value at the time she acquired it - e.g. the probate value if she acquired it by inheritance).

* The 'incidental costs of acquisition': any fees, taxes, etc, that she paid purely in order to be able to acquire the flat, such as stamp duty on the purchase and fees charged by her solicitor or other conveyancer.

* The 'incidental costs of disposal': any fees, taxes, etc, that she paid purely in order to be able to sell the flat, such as estate agent fees and fees charged by her solicitor or other conveyancer.

* Enhancement costs: Capital expenditure on the flat, to the extent that it's improved the flat from what it was when she acquired it to what it was when she sold it (i.e. 'maintenance' capital expenditure that only cancelled out damage or wear & tear that happened during the time she owned the flat can not be subtracted).

* Costs of establishing her legal title to the flat - i.e. that she did legally own it. I'd imagine this is quite rare - but for example if she inherited it but had to pay solicitors to establish that she was the person who inherited it rather than someone else, those solicitors' fees should be an allowable cost.

2) I'll assume that the flat was an investment property all the time that she owned it, rather than her ever having lived in it - if that assumption is wrong, the gain will probably need adjustments. I'll also assume that she didn't make any other capital gains or losses in the same tax year - if that assumption is wrong, she'll need to add the gains and/or subtract the losses. And I'll assume that she doesn't have any capital losses brought forward from previous tax years - if that assumption is wrong, she might well be able to subtract those as well (but ask about them, because the rules are a bit too complicated to fit well into this explanation!). After applying these adjustments if necessary, she'll be left with a figure for the year's total net gains. (Or conceivably but I'd guess pretty unlikely, a negative figure indicating total net losses. If that does happen, she doesn't owe CGT for the year and her CGT allowance isn't usable, so don't bother about the following steps, and she can carry those total net losses forward to future years.)

3) If the total net gains produced by step 2 are less than the CGT allowance of £12,300, the CGT allowance reduces them to zero (with any left-over CGT allowance not being usable) and she'll owe no CGT. Otherwise, subtract £12,300 from the total net gains.

4) Determine how much of her Income Tax basic-rate band she hasn't used. If the remaining gains after step 3 are less than that amount, she'll need to pay CGT of 18% of those remaining gains; otherwise, she'll need to pay CGT of (18% of that amount) plus 28% of (those remaining gains minus that amount).

Gengulphus

Sunnypad
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Re: Capital Gains Tax and Income Tax

#406900

Postby Sunnypad » April 25th, 2021, 8:31 pm

Charlotte, thank you, it is indeed 30 days.

Geng, it's points three and four that are confusing me.

Mum has an accountant who will charge for dealing with that so I was hoping we could simply report and pay to HMRC but maybe not?

It might be sensible to get her accountant involved? I suspect when it comes to it she might want to do that.

Would her next tax return be adjusted automatically if we just report the gain and pay?

Thank you for your list, sadly I don't think there'll be records of the fees linked to the acquisition. I'm going to print that out for easy reference.

I might not have time to hop on here till Tuesday evening now so if anyone posts more, I'll see it then. You are all brilliant, thank you so much.


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