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Owners of vacation homes in the West Midlands tend to believe that UK tax does not matter to them. It can come as a shock when they’re told on a sale that UK capital gains tax will have to be paid. It comes as a further surprise when they understand the conditions regarding deductible capital expenses. But the real sting in the tail is paying somebody else to validate the figures they provide.
The basic principle
Capital gains taxes are levied on the difference between the purchase and sale prices, less allowable capital outlay. The purchase price is elevated by the agency fee and material costs so as to give the genuine cost of purchase. The sale price is decreased by charges incurred in relationship with the sale – mainly the survey costs associated with the obligatory “vendor’s pack.” The difference between these two figures will deliver the gross capital gain.
Tax deductible costs
A vendor will be able to subtract from the gross capital increase certain capital expenses – subject to conditions. First of all, the expenditure must relate to “construction, reconstruction, enlargement or improvement.” Construction, reconstruction and augmentation are easily understood: they will cover the extension or reconstructing of the house or building. “Construction” will stretch to the installation of a swimming-pool.
The deceptive term is “improvement” – the UK phrase used is “amelioration. You might have believed this to be wide enough to cover replacing the kitchen and bathrooms. “Improvement,” however, is understood to be putting in equipment or raising the degree of comfort without changing the actual structure of the house. Installing an elevator, central heating or even air-conditioning is recognized as enhancement, as would be the installing of a new bathroom. The refurbishments of an existing kitchen in that Dordogne property of yours may well however not qualify.
Secondly, the work involved must have been carried out by a UK-registered tradesman. You can’t subtract materials you have bought yourself even if they are for use by the tradesman. In addition, you must be able to produce supporting evidence of the actual costs in the form of invoices from the tradesman concerned and bank statements showing the payment.
If you are unable to satisfy these conditions, you can use as an alternative a lump-sum allocation for costs of 15% of the original price, net of agency fee and material costs. Subtracting allowable capital expenses from the gross capital gain brings you to a net amount.
Time period of possession
There exists then a further allowance based on the period of ownership. For every full 12 months of ownership after five years the gain is lowered by 10 percent. This means that if you own the house for 15 years or more, no capital gains tax will be payable.
Lump sum allowance
When you have calculated the net capital gain, you are entitled to deduct from it a fixed sum of £1,000 pounds for each individual owner. Sellers who are a married couple will be able to deduct £2,000 pounds total.
Adding insult to injury
Some of our British clients, selling their properties, find the conditions for deductible charges not only baffling but difficult to comply with – particularly where they have brought in foreign labour or undertaken work themselves. Or they may simply not have kept the documents needed by way of evidence. But the real sting in the tail comes with the requirement to employ a UK-resident tax consultant in the situation of all sales over £150,000 even if you are taking a cash loss. The tax adviser takes on individual legal responsibility to the UK tax authorities for the correctness of the return, and of course there will be a fee for the service.
Take a look at a selection of available properties listed by Apex Property and find the home of your dreams.
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