Capital gains tax on property disposal split into two

Question:

My wife and I bought a house in June 2001 for £120,000.

We subsequently got planning permission to convert the house into 4 flats, and then decided to sell it. We never lived in it.

In June 2008 we sold it to a local building firm for £250,000.

However since then and due to the various problems in the housing market the builders have had trouble arranging a mortgage. We therefore agreed to take £200,000 now and the rest after they've converted the property and sold 2 of the flats.

It's likely to be the middle of next year at the earliest before the flats are developed and sold.

My understanding if this is that the disposal was split into two. Please confirm this is the case and that we need to show two capital gains tax calculations?

Answer:

As the property was jointly owned the capital gain would be split equally between you and your wife.

In terms of the disposal, the disposal date was June 2008 and presumably this was an unconditional contract. In this case the full disposal proceeds would be taken into account, irrespective of the fact that you are to receive some of it after the 2008/2009 tax year tax year. Therefore the full £250,000 would be brought into the CGT calculation in 08/09.

Note that I've assumed here you are classed as property investors as opposed to property traders. If you were property traders any charge would be to income tax, and not CGT, with the result that the annual CGT exemption would not be available.

You would be a trader if you acquired the land with the intention of resale. If you acquired it with the intention of developing and retaining the property yourself you should be able to sustain an argument for investor treatment.

The capital gain arising would be:

Proceeds 250,000
Costs - 120,000
Gain 130,000

This would equate to a gain each of £65,000. The annual exemption would reduce this to £55,400.

Your CGT charge would then be at 18% (ie a CGT charge in the region of £10,000 each).

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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