Here is a summary of the main components of capital gains tax as it is the area of valuation for tax purposes which we are asked to provide advise on most frequently. Always consult with a tax advisor or accountant for accurate calculations based on your circumstances.
Capital Gains Tax (CGT) is charged on the profit made from selling or disposing of an asset that has increased in value. The amount of CGT due is based on the difference between the selling price (or market value) and the cost of acquiring the asset, including allowable deductions.
Purchase Price: The original amount paid to acquire the property.
Improvement Costs: The cost of significant improvements (e.g., building an extension or converting a loft) can be added to the acquisition cost. Routine maintenance and repairs do not count.
Transaction Costs: Costs related to buying and selling the property, such as legal fees, stamp duty, and estate agent fees, can be deducted from the gain.
This is the amount the property is sold for. If the property is gifted or transferred (not sold for money), the market value at the time of disposal is used to calculate CGT.
The market value is what the property would reasonably fetch on the open market. For non-arm’s-length transactions, such as gifts, a professional valuation may be needed.
The capital gain is determined by subtracting the adjusted acquisition cost from the selling price:
{Capital Gain} = {Selling Price (or Market Value)} – {Cost Basis (including improvements and costs)}
If the property has been used for purposes that qualify for reliefs, those can also reduce the taxable gain.
If you inherit a property, the acquisition cost for CGT purposes is its market value at the time of inheritance (as per probate valuation).
If the property is gifted, the market value at the time of the gift is used, unless the recipient pays full market value for the property.
If the property is your main home, you may qualify for Private Residence Relief, which can exempt some or all of the capital gain. To qualify, you must have lived in the property as your main residence for the period you owned it, or for part of that period.
Each individual has an annual tax-free CGT allowance, meaning you only pay CGT on gains above this amount.
In summary, for CGT purposes in the UK, property valuation is crucial in determining both acquisition and disposal values, especially in non-sale transactions like gifts or inheritances. Always consult with a tax advisor or accountant for accurate calculations based on your circumstances.
