Do I have to pay Capital Gains Tax

[kt.]

Five weeks ago we received a letter from the Inland Revenue stating we owed capital gains tax on £17000 (Amount payable £6800)  from a rented property we sold a couple of years ago.  We never spent this money on ourselves.  It was all reinvested into buying another property.  We submitted tax returns for rental income throughout the period we owned the property.

I thought CGT was only payable if you kept the profit,  not if it was reinvested.  My OH wrote to the inland revenue one month ago but as yet we are still waiting for a reply.  Looking on their website I think we are in the right.  Are they right or are we?

[kt.]

[ceres]

It's not what you do with the profit that matters.  If the property wasn't your main residence, there is probably a chargeable gain.  The first £9,600 of your total taxable gains is tax-free and you can deduct relevant expenses (buying and selling costs, improvements etc.).  There is a good explanation here:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4016337

[kt.]

Thanks.  I looked at all that before we replied  in writing,   and therefore reckon I would only be liable to around £1400 at a push,  if I had to pay some.  I did not think it had to be paid if we did not take the money as income.

Makes me wonder how companies who make millions can be exempt from it due to business perks and allowances by the government. 

[Bill Door]

Unfortunately there is only hold-over relief on business assets.  Rental of a property is not considered to be a "business" unless it is holiday furnished lettings and complies with the Land and property definition usually on page LN2.  Yes I understand that you consider it is a business but the regulations do not concur.

Next thing is to work out what you actually have done. Say the property was purchased on  31 March 1999 for £100,000 and you paid £2,500 to the solicitor. You paid £102,500 for the property.  You sold it on 1 April 2006 for £250,000.  At that time you paid £4,000 to the estate agent and £5,000 to the solicitor (incidental costs).  Therefore your gain is

£250,000 - (£4,000 + £5,000 + £102,500) = £138,500

You have had the property for 7 years and therefore have Taper relief of 25%, tax would be due on £103,875.

Now if the property is in joint names and the rent was split between both of you then the gain should be split between you and both would have the £8,200 exempt gain amount and both of you would be assessable on £43,737.50.

If you follow the above then what I would suggest is that you go to

http://www.hmrc.gov.uk/sa/forms/content.htm

select the year that the property was sold and then drill down until you reach the Capital Gains tax help sheets and try to work it out from there.  There are a couple of example calculations and the taper relief details are shown.

If you still have difficulties then I would suggest that you consult an accountant.

I note that they have charged 40% on the total gain and I assume that Interest and penalties will be in addition, after all the gain has been omitted from the return.  In this instance I would suggest some sort of discussion with someone that knows the issues.

Good Luck.

Bill