Marginal rate - can anyone explain?

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    Marginal rate - can anyone explain?

    I am hopefully selling one of my properties within the 04/05 tax year and would like to know just what is meant by the fact that CGT is charged at 'the marginal rate'.
    To explain - I have no income other than rental income but this tax year my expenses will exceed my income (due to non paying tenant and void property). Therefore my 'income' will effectively be a minus figure!. I am only expecting to make a gain of 16k for cgt purposes (before cgt allowance) so if my income is -4k and my gain is 8K (after deducting cgt allowance), what will my marginal rate be?
    Might it be 0%? as I havent used up all my personal allowance for the year?
    Or would it be 22%? regardless?

    #2
    Likelystory, I am not an expert on this but my understanding is this...

    You need to add all of your purchase costs together (ie purchase price/legal fees/arrangement fees/stamp duty etc and deduct that from your total selling fees (selling price/legal fees/estate agency fees/advertising fees etc)

    The difference is your CGT liability before allowances.

    You then need to deduct from that figure your CGT allowance (currently £8200) If you and your wife/partner are joint tenants then you are each allowed the £8200 entitlement

    You may be able to claim taper relief (dependent on the amount of time you have owned the property) Not quite sure what the rates/scales are to be honest.

    You are then somewhere near the figure you need to be at for your CGT liability.

    Your income (rent) is a seperate tax issue altogether from CGT.

    As I said at the beginning I am not an expert but hopefully the information helps.

    I would recommend you seek professional advice from a good accountant

    Good luck

    JDO

    Comment


      #3
      Neither am I an expert, but I can add a little more: once your nett liability to CGT has been calculated in the way described above, it is considered to be part of your income, so tax is paid as if it was part of this. Hence if some of your tax allowances had not been used up, they would be counted against your CGT gains to reduce what you pay to the revenue. Everybody talks about CGT being 40%. This is only true if your income from other sources in the tax year concerned have put you in the top tax band.

      P.P.
      Any information given in this post is based on my personal experience as a landlord, what I have learned from this and other boards and elsewhere. It is not to be relied on. Definitive advice is only available from a Solicitor or other appropriately qualified person.

      Comment


        #4
        Minus income?! Is this posible?

        Thanks for both your replies.

        This is the crux of the matter, as I see it.
        I have not used any of my personal tax allowance - and in fact I have a minus figure as my income because my costs have far outweighed my incomings.
        So if my CGT gain is added to my (minus figure) income it only then brings me into a positive amount that could be construed as income for income tax purposes.
        If this figure is lower than my personal allowance, can I be deemed to have a tax liability at all?
        Hope you can understand what I am trying to say, I am having a little difficulty in trying to describe my situation, but would appreciate any input

        Comment


          #5
          Likelstorey, my original posting is slightly misleading.

          Your selling costs (ie solicitors fees, estate agents fees etc) should be deducted from your property selling price - not added to it.

          Sorry for the confusion

          JDO

          Comment


            #6
            PPilcher,
            That is what I was hoping to hear.
            I will ask an accountant/tax adviser and report back my findings.
            I couldn't understand how I should be liable for 40% tax when I haven't used any of my nil rate band (or the 10% part) and at best would get into the 22% band after taking into account my income, expenses, CGT allowance etc.

            I'll keep the forum posted.
            Many thanks JDO for your comprehensive response too.
            Whilst i understand your comment that my income is a separate issue to CGT it might be that the interrelation between the two (in my particular circumstances) could be important.
            Hope so anyway.
            Thanks again

            Comment


              #7
              CGT is charged at the highest amount of tax you pay ie 22% or 40%

              You should not confuse revenue with capital taxes

              Revenue taxes are computed against your rental income less business expenses

              Capital taxes are computed against gains or losses on assets, ie the properties themselves with adjustments for the cost of your investment and inflation.

              If you have not disposed of all or part of an asset, you have not triggered a cgt event, so no cgt tax will be due. Disposal comes from the date the contract becomes unconditional ie exchange or completion, depending on the circumstances.

              If you have a rental income loss, this can be offset against future revenue profits due for tax

              Likewise a capital loss can also be offset against a capital gain ie if you have shares to sell at a loss, this can be offset against a rise in the price of the property you have sold.

              There are also simple ways to mitigate capital gains tax depending on personal circumstances,

              If you want to discuss this in more detail, feel free to call.
              Steve Sims

              Yardleystar Accountancy
              0870 242 1047

              Email: ssims@yardleystar.co.uk

              Comment


                #8
                Still somewhat confused..

                >CGT is charged at the highest amount of tax you pay ie 22% or 40%<

                I am currently a non taxpayer.

                >You should not confuse revenue with capital taxes.
                Revenue taxes are computed against your rental income less business expenses<

                I believe that for 2004/2005 I will have a revenue loss when I take into account outgoings v income (due to voids and errant tenant).

                >Capital taxes are computed against gains or losses on assets, ie the properties themselves with adjustments for the cost of your investment and inflation. If you have not disposed of all or part of an asset, you have not triggered a cgt event, so no cgt tax will be due. Disposal comes from the date the contract becomes unconditional ie exchange or completion, depending on the circumstances.<

                I am hoping to exchange contracts in this tax year (and to complete this tax year would be nice but it may need to be after 5th April)

                >If you have a rental income loss, this can be offset against future revenue profits due for tax.<

                I wouldnt expect to have a profit that would use up my personal tax allowance in the next few years. How long can you carry forward a loss?

                >Likewise a capital loss can also be offset against a capital gain ie if you have shares to sell at a loss, this can be offset against a rise in the price of the property you have sold.<

                Unfortunately I do not have anything to sell at a loss to offset against my gain.

                My gain will only be about 18K (after selling costs etc).
                I realise I have a CGT allowance of a little over 8K and the CGT on the remainder isn't exactly a huge sum, but I am curious to know whether I can use any of my personal tax allowance or if I will be charged at 22% on all of it.

                I shall be visiting a local expert soon, so will report back what they have to say.
                Many thanks!

                Comment


                  #9
                  Your still confusing revenue with capital taxes.

                  Your personal tax coding has nothing to do with cgt - the annual cgt allowance is your 0% relief then tax is paid at the appropriate rate on the rest ie 22% or 40% - once you have your indexed gain (after deducting various costs and expenses from the sale price) you deduct the personal exemption and apply tax to the balance. You cannot offset other unused personal tax allowances against this.

                  The formula for computing cgt is quite specific and i am afraid no amount of wriggling will induce the IR to change it.....
                  Steve Sims

                  Yardleystar Accountancy
                  0870 242 1047

                  Email: ssims@yardleystar.co.uk

                  Comment


                    #10
                    There is a lot of wrong information in the posts so far.

                    Here is the correct position.

                    If you have made a loss in letting of your property, this can only be carried forward against future lettings income, if any. It cannot be relieved against your other income or capital gains.

                    Similarly, your annual personal allowance is only available against your taxable income and therefore it cannot be used to reduce your capital gains. Instead of this, you have the annual exemption amount of £8,500.

                    Your first step is to calculate your capital gains. This is basically your selling price less selling and legal expenses, purchase price, buying costs and inprovement expenditire which you have not previously claimed against rental income.

                    You may have other reliefs, eg, PPR and lettings relief if you ever lived in the property as your only or main residence, taper relief depending on how long you owned the property, and finally the annual exemption of £8,500, assuming the property is in your name only and not jointly owned.

                    Any remaining amount is added to your taxable income in the year of disposal. Assuming you have no other taxable income, your gains will be taxed to 10% upto the lower rate band, the remaining at 20% upto your basic rate band and the excess, if any, at 40%.

                    In your case, it will only be at 10% and 20%.
                    Private advice is available for a fee by sending a private message.

                    Comment

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