Making sure a selling price adds up for capital gains. Property investors must know the break-even figure to set the asking price and to negotiate with a prospective buyer who makes an offerMake Text Bigger
House sellers need to do their sums before accepting an offer on a property investment to make sure the figures add up to pay any tax and settle the mortgage.
Property investors must know the break-even figure to set the asking price and to negotiate with a prospective buyer who makes an offer.
Property accountants are often surprised that clients selling investments agree prices without considering the business implications.
The selling price has to cover:
- Settling any outstanding mortgage – the lender will provide a settlement figure that includes any redemption charges. This figure generally goes down as long as mortgage repayments are continued until the day of completion
- Settling any other finance secured on the property – again lenders can supply settlement figures for second loans or overdrafts etc
- Selling costs – these include estate agents, auction fees, and legal costs. Anyone providing these services can give a quote
- Capital gains tax (CGT) – a tax adviser can work out the likely amount of CGT due and whether any savings are available from switching shares of ownership between lower and higher rate taxpayers.
When all these costs are available, make a list and tot them up. The total is the break-even figure for the sale – the lowest amount that clears all the debt and pays all the bills relating to the transaction.
Accepting an offer below this figure means the property owners have to input their own money to clear the bills.
Any sale above the break-even figure is profit – although the CGT calculation may need adjusting to reflect the additional gain.
Looking at the CGT bill before accepting an offer is most important. Tax rules say the selling price for CGT is the value on the day of disposal of a property – that’s the day of completion when ownership passes from one party to another.
A tax adviser can help property investors pay less CGT before the completion date, but once completion has passed, the transaction is locked and no action can change the amount of tax due.
If you would like to discuss any aspect of your property taxation or accounting strategy with a specialist advisor please call our Customer Care Team on 01603 894525.
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