I was asked this week to give an indication of tax due on a property sale. The chap asking said he had already had someone out that had given him a figure. Based on a quick fact find I said I thought his figure was too low. We went through the details and figured out what was happening.
The tax figure had been calculated based on the net proceeds after paying off the mortgage rather than on the profit on disposal.
Our chap bought a house for £70k and is selling it for £170k. He had been told the tax would be approx £11k. Consider the tax rate is 24% I told him I would expect to see just under £24k after allowing for the CGT annual exemption.
He then told me he’d only be taking about £50k from the sale as he had to pay the mortgage off. The mortgage was £120k. This, he said, is why the other advisor was right.
The problem with this however is, apart from being completely wrong, that tax ignores the mortgage altogether in this case. The profit on the sale is £100k. Tax is due on that £100k. It just so happens that this chap had already taken some of the profit out of the property via remortgage. He’d already had his deposit back plus £50k when he remortgaged some years ago. The £50k he will realise now therefore has to cover the tax on the full uplift…