Consider the Present Value of assets when calculating capital gains tax

You can deduct SDLT, estate agency and conveyancing fees (purchase and sale).

I didn't realise one could deduct the SDLT. Can you elaborate by example?

Thanks

Hi Hamish, costs incurred in aquisition and disposal of assets are generally deductable for CGT purposes as sale & disposal costs.

Reply to the comment left by "Paul Baker" at "05/04/2016 - 09:03":

Thanks Paul,

To clarify,

If I pay stamp duty when buying a house for the purposes of BTL, I can have that back when I sell?

Out of curiosity, does this apply to the new 'enhanced' stamp duty rates which are upon us?

Even if a claim back the stamp duty, the CGT calculation gap I illustrated remains massively in HMRC's favour.

Thanks

Reply to the comment left by "Hamish McBloggs" at "05/04/2016 - 13:10":

Hi Hamish, sorry for the late reply.
Whilst I would employ the caveat 'I'm not an expert!', the legitimate costs in acquiring and disposing of an asset which would include stamp duty, estate agents fees, stockbroker fees (in the case of shares) are all allowable expenses to be deducted from your profit. I see no reason why the enhanced stamp duty rates would not also be allowed as a deductable expense.
And yes everything still remains massively in favour of HMRC!

This capital gain is not really money you have earned or deserve. It is just that you were lucky that prices went up so much. Therefore, ethically speaking, if anything CGT on such gains should be higher, not lower. Though of course I can understand that you desire to have as much money as possible...

There is an economic principle called opportunity cost. What could you have gained if you had not spent the money on property. Are you saying you should not ever increase your capital what ever you do with it???
How do you know how hard someone worked or what good they did for others to build the capital to invest in the first place???
Capitalism has many things wrong with it, but hard left socialism has no concept of human nature and will always just end up running out of someone else's money.

Hi E.M.,

'Present value' levels the playing field and enables the true relative gain to be evaluated. It permits one to compare apples and apples. Every finance officer does this to examine reinvestment options for their company. If property prices increase disproportionately then there will be a relative gain. I property 'does well' then the relative gain will be higher.

I want to be convinced otherwise. I am looking for reasoned argument that supports fixing the purchase price at the historical numerical value and completely ignores inflation. I want someone to convince me that the current calculation method is the right thing to do.

Do any accountants or tax officials want to comment and help me drill the depths of this argument so a petition would be undeniably reasonable? Either that or argued out of existence here without bothering the Government.

What follows is in no way intended to make anyone suck eggs.

Taper relief attempted to provide compensation against rising prices but was considered overly complex to administer and as far as I can tell was disbanded with the cost of complexity being cited as the main reason. My personal view is that this is probably true because the implementation of the system was such that it had to work using the existing revenue administrative framework. It was not a natural part of the system and could not 'key in'. It was bolted on. Additionally, revenue opportunities were a significant incentive to disband the system. (Compare this with the recent 'cliff edge' child benefit debacle)

Is present value used in any regulated calculations?

If one considers pensions, 'Present value' is used to calculate how much past+future annual pension contributions are likely to be worth in 'today's' money such that the owner of the pension can compare their likely annual income with their current Council Tax bill. So there is a regulated 'system' in existence to calculate present value. But this 'system' attempts to predict (looks into the future). Given the stochastic nature of this calculation problem, establishing a true 'future' present value is immensely difficult and error prone (and why they give a range of potential annual incomes in a pension statement and a list of core assumptions used in the calculation. e.g. you keep paying in).

But when selling something, we are not predicting future interest rates as with pensions. We actually have the historical data albeit 1 year deferred. The ONS publish it. It is therefore not beyond the wit of man to perform a present value calculation. (I did it for my initial post).

If we apply the Government's preferred calculation method to pensions, early pension contributions would be worthless. The value of the contribution would be fixed in time and is effectively the same as receiving zero interest on your savings.

If one were to take an oversimplified example by way of illustration (The numbers are approximately correct and I have used historical RPI figures but the example won't survive detailed scrutiny and there are buckets of assumptions)

.... Go back in time to 1960 and you have 2 choices

1. Buy a car for £2,000 (an e-type using pound notes).
2. Put your £2000 into a savings account that gives you interest at the RPI (a tracker)

Return to 2015 (there are only RPI figures to 2015)

1. Your car on ebay is £40,000 (slightly rusty, borderline economic renovation and in real terms is no more valuable an asset to you than it was in 1960).
2. Your savings statement shows you have £40,000.

Now sell the car and immediately you have a £38,000 capital gain by HMRC's calculation method.

Oh, and err, one can only use the current year's CGT allowance which is blatantly unfair.

But you are allowed to deduct the ebay 1% (the sop)

I contend that this is fundamentally wrong.

Look at the result of taking the second choice.

Your savings are worth no more to you today than they were in 1960. On a Sunday stroll to the Load of Hay with my parents I would be given a bottle of coke with a straw, my Dad had a pint of Watney's Red Barrel, my Mum had half of mild and the dog had a packet of Smiths crisps. Still had change from half a crown (12 and a half old pence out of your old £2000). Or today £3/per pint and 70p for a packet of crisps out of your £40k.

What if you had to pay CGT on £38k of your savings?

Paying 25% income tax a year on the savings interest would make your savings total about £20k in 2015. But if you were sensible and to keep things simple you would have used Bonds, Premium bonds, TESSAs when Nigel introduced them and latterly ISAs to reduce the tax liability.

Boring saving (taxed interest) is a much less risky but similar present value bet to the e-type after CGT but your savings/car are now only worth £1000 old pounds. (and a pint today would have to be £1.50)

And this is my second point. What incentive do we have to take all the risk?

Thanks

Hamish

Calculations of capital gains are based on the present value, or fair market value. When an asset at the best price one can get then that value is the sale price.

If you buy a share for £10 and later sell it for £20 then quite correctly your gain is £10. Same goes for a house.

The perceived issue is that when you hold on to the asset for a very long time then you may consider that your actual gain is not as big as this calculation makes it.
E.g. you bought a house for £4,000 forty years ago and sell it now for £300,000. Capital gain huge at £296,000.
But forty years ago £4,000 represented as much as, say, £200,000 today so you might consider that your gain is actually only about £100,000.
Taper relief compensated for this.

The counter argument is that if you had kept those £4,000 under your bed then today you would still only have £4,000 so that anything beyond this must really be a gain.

Hi Romain,

Present value is real, not perceived. Even if the asset is held for a short time inflation erodes the value. Prices rise every year. (currently 1.2%)

If 40 years ago you put the £4000 under your bed you would, as you say, still have £4000 today. But whilst it has been under the bed collecting dust for 40 years prices have risen. Today your £4000 will have the purchasing power of about £280.

That is a capital loss. HMRC are unlikely to want to share your 'investment risk' (loss) and give you money back!

To be a capital gain, your £4000 must have greater than £4000 purchasing power today and that means you need to put it in an interest bearing account that keeps pace (or better) with inflation.

I interpret capital gain very simply as follows:

If the asset is worth more after the time value of money is considered then there is a gain.

Regards

Hamish