Understanding Capital Gains Tax

To understand the capital gains tax, we must begin by understanding exactly what is meant by "capital gains". Capital gains is the income that a person gets from the sale of an investment. These investments may take the form of a piece of real estate property like a house or a farm. It can also be a family business or even a work of art. The capital gain is basically defined as the difference between the money that is realized from the sale of an asset and the price that was paid for it.

The amount of the tax that is imposed varies and actually depends on a variety of factors, which even include how long the seller has owned the investment/property as well as what type it is. The capital gains tax will not be asked for until the investment/property is actually sold. For instance, if the stocks in your portfolio have been appreciating in value, you can rest assured that you won't have to pay any type of taxes on them unless you have actually sold the stocks.

Investors should also remember that unlike other taxes, the rate imposed on the capital gains tax is not fixed. The rate imposed will depend on how long the asset has been owned. A good example would be an asset that has been owned for less than year. The capital gains tax that will be imposed on the sale of this property will be at the same rate as an ordinary income. On the other hand, the tax rates that will be given on the sale of a property that has been in the possession of the owner for more than a year can end up being lower.

As with all other tax impositions, there are a few rules that you need to be aware of in order to prevent any kind of major tax liabilities.

One rule that you should remember is that in most cases you can completely avoid capital gains tax if the house that you are planning to sell is considered as your principal residence. In order for a house to be considered as the principal residence you must have taken residence there for two of the last five years. The two years imposed don't necessarily have to be sequential years or even the most recent two years. Just as long as you fulfill the two-year rule the government will consider the house your principal residence. In fact, you don't even need to be living at the house at the time that you sell your property.

Penny Stocks and Capital Gains

The whole purpose of investing in capital gains or the profits made from the investment or sale that was previous, the real cause is to make sure that on the issue of penny stock or any stocks for that matter is to get more profit on each share base on the sale price and purchase.

And for anyone looking to deal with capital gains penny stocks there are a few things they should know. One of the first things you should note is that the capital gain per share will not be high. The whole reason for penny stocks being penny stocks is that they are available for less than $10 dollars per share. There have been a few stocks that have hit some high markers in terms of gross capital and this ends up becoming a part of the list of the more powerful stock markets. The better option is if you can predict stocks then you choose the right one and purchase a lot which will in turn boost your capital gains, or maybe you would want to go on a more international stock market. Although they are penny stocks they have a possibility to arrive back to their normal share prices.

This is a very good reason why you should check the news letters very regularly, there are quite a number of news letters out there but the best one's will be cheap and will provide you a number of pick ups of stocks that occurred for the first quarter.

Deferring Capital Gains Taxes on Business Property

The tax deferred exchange provides real estate owners with one
of the last true tax breaks and the only method of deferring tax
on the sale of investment and business property. Most
taxpayers know they can exclude the gain on a sale of their
personal residence. Unfortunately, many business and
investment property owners fail to capitalize on the benefits of
another type of tax-deferred exchange, under Internal Revenue
Code Section 1031.

Far too many business owners sell their business and
investment property and pay capital gain taxes because they are
unaware of provisions in the tax code that allow for deferral.
Internal Revenue Code Section 1031(a)(1) states in part that
"no gain or loss shall be recognized on the exchange of
property held for productive use in a trade or business or for
investment if such property is exchanged solely for property of
like kind which is to be held either for productive use in a trade
or business or for investment." Examples of property types that
typically qualify are vacant land, office buildings, warehouses,
farmland, single-family rental units and shopping centers. Even
leases with 30 or more years remaining are considered real
property and can be traded for other real property.

How does one get started? The procedure is fairly simple as
Treasury Regulations issued in April of 1991 provide a
guideline for taxpayers to follow. Once a buyer for the property
to be sold (the "relinquished property") has been found, a
phone call to a selected "qualified intermediary" to assist with
the Section 1031 exchange is all it takes to begin the process.
The qualified intermediary will produce the necessary legal
documentation required to facilitate the exchange process.
Once the closing of the relinquished property has occurred, the
taxpayer has 45 days from the date of closing to identify in
writing to the intermediary the possible replacement properties.
Due to significant restrictions, it is usually best to identify no
more than three replacement properties. The final step is to
close on one of the identified properties within 180 days from
the date of closing of the relinquished property.

Although the 1031 tax code section is very liberal, various
modifications over the years have resulted in a few additional
restrictions. Partnership shares, notes, stocks, bonds,
certificates of trust cannot be exchanged. A taxpayer who holds
a partnership interest or shares in a corporation that owns real
estate cannot trade that interest for similar share interests.
Business owners should consult a tax expert or legal advisor in
this situation.

With the reduction in capital gains tax rates, taxpayers were
given a rare break. However, this break was not as generous as
originally proposed. Most taxpayers are aware of the new
capital gains tax rate of 15 percent, lowered from the previous
28 percent rate. This is applicable for gain generated from the
sale of capital assets held for more than 12 months. At the last
minute, however, Congress altered the tax rate for recapture of
depreciation taken on real estate to be taxed at 25 percent. This
higher rate is applicable for all depreciation taken after May 6,
1997. Combining the 25 percent depreciation recapture rate
with state and federal tax rates could cost a taxpayer who sells
business real estate over to 40 percent or more of their profit.
On the other hand, a property owner who chooses to perform
an IRC Section 1031 tax deferred exchange can defer taxes on
the all of the capital gain! This leaves the prudent exchange or
with the entire amount available for reinvestment.

Many business owners are unaware that personal property used
in a business, such as a medical practice, can be exchanged as
well. The major difference between a real property and
personal property exchange is what the Internal Revenue
Service considers "like kind" property. I.R.C. Section 1031
defines like kind as "...property held for productive use in a
trade or business or for investment." Like kind as it applies to
real property is very broad in definition. Determining whether
personal property is like kind to other personal property
requires a much narrower scope. The Internal Revenue Code
does not define "like kind." The IRS has published regulations
that can be used to decide if an exchange involves like-kind
properties. The Treasury Regulations distinguishes between
two types of personal property: depreciable tangible personal
property (DTPP); and other personal property (OPP), which
consists of intangible and non-depreciable personal property.
DTPP can only be exchanged for other DTPP. These properties
must be of a "like class" or "like kind." In determining whether
DTPP is of a like class the Treasury Regulations designate 13
general asset classes. These classes combine particular types of
personal property into a certain class group. Some examples of
these groups are office furniture and fixtures, information
systems, airplanes and helicopters, automobiles and taxis, and
buses.

The Regulations also designate that personal property can fall
within product classes contained in the North American
Industry Classification System. These numeric codes can be
used as an alternate method to define the characteristics of a
particular property.

OPP is difficult to classify as like kind to other OPP. It does
not fall within the like class safe harbor available to DTPP.
Intangible personal property, such as a lease or copyright, can
be considered like kind to similar intangible property. The
determining factors are the nature and character of the rights
involved and the nature and character of the underlying asset.
Selling a business can create more than one personal property
group in which to exchange. The IRS looks at the sale of a
business as an exchange of each asset to be transferred, and not
the exchange of the business as a whole. The underlying assets
of a business (e.g., lease value, covenant not to compete,
equipment and fixtures) will need to be analyzed in respect to
their comparable replacement property. Each asset is placed
into the proper exchange group. An exchange group is a
subgroup of the total assets exchanged. Every exchange group
will either have a surplus (trading up in value) or a deficiency
(boot). When the total fair market values of the properties
exchanged are different, the value equal to that difference is
called the residual group. The property in the residual group
will consist of cash and other property that does not fit into an
exchange group.

An example of a business exchange would be the exchange of
one medical practice for another. The relinquished medical
practice value consisted of: (1) the medical equipment (x-ray
machines, etc.) and office fixtures; (2) a covenant not to
compete; (3) lease value for the below market lease of the
office; and (4) client patient lists and files. The medical
practice acquired will generally have similar components of
value. To balance this exchange each separate component is
matched up with its like kind counterpart. A surplus in one of
the exchange groups is not taxable as the Regulations allow for
trading up in value. Any deficiency - going down in value -
would be taxable as "boot."

The Regulations provide the non-yielding rule that goodwill
and going concern value in one business can never be like in
kind to goodwill and going concern value in another business.
In the example of the medical practice exchange, the client
patient lists and files would probably be viewed by the IRS as
goodwill, and should not be included in the exchange. A
prudent tax planner would attempt to allocate value to the
depreciable or amortizable personal property, such as the
medical equipment and office fixtures, to avoid this problem.
Additional personal property not eligible for exchange
treatment is inventory. The inventory of a business is held for
resale and does not fall within the definition of Section 1031
property.

Anyone considering deferring tax under IRC Section 1031
should obtain competent tax/legal advice before proceeding
with a transaction. A mistake can be costly.

Capital Gains Exclusion

The Taxpayer Relief Act 1997 allows the homeowner to profit without paying tax on the sale of the property. The single homeowners are allow to profit up to $250,000 without paying tax, while the married homeowners are allow to profit up to $500,000 without paying tax.

Before May 7, 1997, the only way not to pay tax on capital gains is to use the capital gains to acquire another property. These homeowner tax breaks come as a surprise and relief for many homeowners. Now, the capital gains are tax exempt as long the sale comes after the law took affect.

There is no limit of the use of the Capital Gains Exclusion. The homeowners are able to avail as many times as possible.

However, the sold home must be a principal residence. That means the homeowner must have live at least two of five years on the sold home. It does not have to be sequence as long as the total comes over two years.

For any rental property, it can easily convert into principal residence. Suppose the homeowner decides to live on the rental property, the homeowner needs to stay at least two years on the rental property.

The home property does not have to be principal residence at the time of sale. So, the homeowner can rent out the property a few months before the sale of home property.

The married homeowner does not have to live on the same time. For example, the bride got married after a year and three month of living on the home. In nine months, the married homeowners can be tax exempted from capital gains.

Additionally, one of the married homeowner did not use the Capital Gains Exclusion within two years of sale. For example, the bride sold her home to live with groom. The bride used the capital gains exclusion. So, the bride and groom can only use the Capital Gains Exclusion after two years.

For special reasons, the homeowner can prorate the capital gains exclusion on health, employment, and unforeseen circumstances. For example, a heart attack may force a homeowner to sell before two years. Suppose the homeowner lived for twelve months, the homeowner is tax exempted for twelve / twenty four months portion of capital gains.

A great job offer comes along. The homeowner needs to move. For the homeowner to move, the homeowner needs to sell the home. The homeowner can also prorate the capital gains.

The unforeseen circumstances are national disaster, war, terrorism, death, divorce, separation, and multiple births.

The capital improvements increases the home values. As the home values increase, the capital gains also increase. You may worry how much tax that you have to pay. The Capital Gains Exclusion may well save you taxes. For the latest tax laws, you may want to get in touch with IRS, or tax advisors.

Preparing Income Taxes - Why You Need to Know About Capital Assets

The IRS is in the business of collecting revenue to support our government. It collects taxes on various forms of money we "accumulate". We are taxed on income we earn; on interest we receive on savings, on dividends from stock we own, and from gains or losses from the sale of our possessions. The IRS Tax Code often categorizes these possessions using negative definitions. It is very confusing! According to the IRS, "our stuff" might belong to some category of property UNLESS it is listed as an exception to that category! For example, in IRS-speak, capital assets are defined as any property that is not explicitly listed as an exception! Sounds crazy (or deviously clever)? Let's start with that negative definition...

Some stuff is real and some stuff is personal. Real stuff is typically associated with "dirt"; like real estate, buildings, or just land. Personal stuff is anything that is not real! Personal property is "movable". Your car, your refrigerator, and your lawn mower are stuff you can hold, move, or break. This "stuff" or property is tangible; it has "substance" and usually some intrinsic value. You can also have intangible property like pieces of paper called stocks and bonds. The value of the "paper" is in the rights of ownership it conveys; they are examples of intangible personal property.

Thus, almost all the "stuff" you own for personal or investment use is a capital asset. Your car, your refrigerator, your lawn mower are examples of personal-use property. The definition begins to blur though because while your home is real, personal use property, a rental home that is not your residence would be business-use property. That rental is maintained to produce some form of income. It might also be considered investment-use property because it has the potential to increase in value over time.

But there is an even more important classification the IRS relies on to collect revenue: holding period. When "stuff" is owed for periods of time that exceed 12 months and a day, the gain or loss from the sale of that property is classified as long-term rather than short-term. The net capital gain is the difference between more preferably long-term gains (or losses) over short-term gains (or losses). The tangible "stuff" you use for non-business or personal reasons is called a capital asset. When you sell this kind of "stuff", any profit or amount over the "original cost" is considered a capital gain and, most important, is taxable. You are required by law to report a capital gain on your income tax return. Depending upon the size of a capital gain, you might also need to make an estimated tax payment! You calculate the gains or losses on Form 1040, Schedule D, Capital Gains and Losses and transfer the net amount to Line 13 in the income section on the top page of your IRS Form 1040. You can find out more information on the IRS website, IRS.gov.

Recording Income Or Capital Gains

To keep a record of your investments income like interest share and also dividends or capital gains which are issued by mutual companies here are the procedures.

One you should display the investment account register, this is by clicking the accounts and bills link then select the account list then the money will show pick an account to use this window. After that click on investment accounts, then the display comes up for the account register for mutual funds. The second thing to do is to state that you want to record your purchase and additional shares from the mutual fund, after that click the investment transaction link, and then this information is added at the bottom of the account registry, and to record a new transaction click the new button.

The next thing to do is state on which day the income or capital gains were received in the date box. You can either enter the information in the box provided or you can click the date box button to access the program's pop up calendar. Next click the investment box and select the mutual funds from the list of investment funds shown. To identify this particular transaction you will have to enter it as capital gains transaction, click on the activity box and then select the preferred activity from the list. If you are particularly in record interest click on interest, if you are recording a dividend then select dividend. After that select the necessary option that you need.

Capital Gains Tax (CGT) - UK Landlords

The other major tax that affects landlords only arises when they sell a property at a 'profit'. At this point you may be liable to pay Capital Gains Tax (CGT). The profit is obviously the difference between what you bought the property for and the selling price. The good news is that even if you have made a profit, you are still not automatically liable to pay CGT. This is because there are a number of exemptions and allowances.

Base Costs

First of all, before deducting your allowances you will need to establish the Base Cost of the property. To establish the Base Cost additional costs need to be added to the initial acquisition costs (or where the property was acquired prior to 31st March 1982 the market value on that date which ever is the higher - a process known as rebasing).
These are:

* Incidental costs of acquisition (e.g. legal fees, stamp duty, etc).

* Enhancement expenditure (e.g. the cost of building an extension to a property).

* Expenditure incurred in establishing, preserving or defending title to, or rights over, the asset (e.g. legal fees incurred as a result of a boundary dispute).

The initial capital gain is then calculated by taking the Base Cost from the sales price.

EXAMPLE
Tom bought his bungalow in July 1995 for £50,000. He paid stamp duty of £500, legal fees of £350, mortgage broker's fee of £250 and removal costs of £535.
The place was in a bad state of repair as an elderly couple had lived in it previously. Therefore, it needed complete modernisation. These works cost as follows:

1. redecoration £2000

2. new kitchen £5000

3. new bathroom £3000

Not content with this upgrading work for his tenants. Tom's next project was the erection of a shiny new conservatory to house his tenant's collection of carnivorous houseplants. This cost him an additional £15,000 (comprising of £14,000 construction cost and £1000 design and building regs fees).

However, in his enthusiasm to secure the maximum floor space. Tom built very close to his neighbours Jerry's boundary. Jerry was a little jealous of Tom's magnificent erection and aggrieved that it had crossed onto his boundary. He instructed his solicitor to send a letter threatening legal action to have it removed. Tom contested this and after Tom had spent £500 on legal fees, Jerry dropped his action.

In 1999 Tom suffered damage to his weather vein of £500. He secretly suspected that it was malicious damage by Jerry but was unable to proof anything. When Tom tried to claim for damage to his weather vein, the insurance company refused to pay out, stating it was storm damage and classed as an act of god not covered by his policy.

In 2000 fed up with Jerry's constant agitation. Tom sold his bungalow for £125,000. How much was Tom's Base Cost for CGT purposes?

ORIGINAL COST £50,000

Incidental cost of acquisition £1000 (legal fees, stamp duty and mortgage broker's fee). The removal costs were a personal cost and not part of the capital cost of the property.
Refurbishment works

£10,000 classed as enhancement works & therefore a capital cost
Building of conservatory

£15,000 also classed as enhancement works & therefore a capital cost
Legal fees defending title to property £500 contesting boundary with Jerry

TOTAL BASE COST

£76,500

Annual exemptions

The personal allowance allows each individual to make a certain amount in capital gains each year without having to pay CGT. These exemption changes every year. In the tax year 06-07 it was £8,800. Unfortunately, this exemption only applies in the year of disposal of the asset. Unused balances from previous years cannot be carried forward.

In addition to the annual CGT allowance there are a number of expenses and deductions that can also be taken into account to reduce your potential liability. Some of these are used to generate the Base Cost as previously mentioned. Expenses that are deductible are:

* the costs of acquisition such as solicitors fees, mortgage brokers fees, etc

* money spent on the property, including renovation and improvement costs

* the cost of disposal such as estate agents, solicitors, advertising. Remember not to get caught double counting the costs you may have already included under Schedule A as a repair.

It all seems fairly straight forward up to now!? However, just to make things a little more interesting, the Revenue have two minor complications called Indexation Allowance and Taper Relief.

Indexation

Indexation, which was effectively replaced by Taper Relief in 1998 was used by Government to account for inflation in the calculation of CGT. Therefore, where a capital gain was made, it allowed a proportion of the increase to be deducted.

This practice reflected the time when inflation alone would have resulted in large increases in capital value. It should also be noted that indexation relief may only reduce or extinguish a gain; it cannot convert a gain into a loss or increase a loss.

The calculation of the indexation allowance commonly called the 'indexation factor' is made according to the formula given below and rounded to three decimal places. The RPI or Retail Price Index is simply a measure of the price of goods and services produced by the Government's Office for National Statistics (ONS) as a way of measuring prices and inflation.

The formula for the Indexation Factor calculates what the rise in the value of the asset disposed of would have been as a result of inflation given the base date of March 1982 & the end date of April 1998 when Taper Relief was introduced. Often these figures have been already calculated and are available in the form of a table, which can be used to speed up the calculation process.

Formula for calculating the 'indexation factor'

RD = RPI in month of disposal or April 1998 whichever is the earliest

RI = RPI for March 1982 or month in which expenditure incurred, whichever is the Later

(RD - RI) / RI

Taper relief

From the 6th April 1998 taper relief took over from Indexation. Properties purchased before this date still benefited from indexation. However, gains after this date were subject to the new tax regime. Taper relief reduces the chargeable net gains according to how long the asset has been held.

Why is it called Taper Relief? This simply refers to the way that the amount of the gain liable for CGT 'tapers' off the longer the asset is held. Taper relief is given on the net gains chargeable after the deduction of indexation allowance and any capital losses realised. It is charged according to the rates stated in table A below.

Assets acquired before March 1998 qualify for an additional year to the period for which they are treated as held after 5th April 98. As you can see the taper for business assets is more generous. Unfortunately, residential rental property does not count as business asset because property investment is not classified as a qualifying trade. The exception to this is holiday lets. Investing in a holiday let therefore could be a way to acquire a property and dispose of it quickly without incurring a large CGT liability. I go on to discuss 2nd homes in more detail in the Landlords Bible.

TABLE A

No. of complete years after 5/4/98 for which asset held

Gains on business assets

% of gain chargeable Gains on non -business assets

% of gain chargeable

0 25 100

1 25 100

2 25 100

3 25 95

4 25 90

5 25 85

6 25 80

7 25 75

8 25 70

9 25 65

10 or more 25 60

It is possible to use the increased business taper relief where a qualifying business already exists and say acquires a residential unit for use by the staff. Such a unit is considered to be a business asset rather than a personal asset and therefore would benefit from the preferential taper relief. Obviously it would have to be made quite clear that the unit was used or required in connection with the business and was not just let to the public.

Occasionally the disposal of the investment property may not be through the open market but to a connected person e.g. to a relative or a family company. In this case HMRC makes the automatic assumption that the bargain is not at 'arms length'. In this case a "market value" is substituted for the actual sale proceeds if the two amounts differ.

Of course one thing to note is that valuation of property to many is an art not a science and as a result there is an acceptance that valuations by different agents can vary by as much as 10%. If you are planning a transfer, then make sure that you evidence your 'market value'.

Therefore, it would be best to obtain a number of written estate agents valuations. Obviously you then select the valuation that most closely reflects the 'market value' at which the transfer took place.

Generally, there is no CGT payable where there are transfers between husband and wife and also where property is transferred to a charity.

Main residence exemption

As I'm sure you are aware, where a property is occupied as a person's main residence they are not liable for CGT on disposal. This tax exemption is also known as Private Residence Relief or PRR. That's why you don't have to pay CGT when you sell your home. There are, as in all cases in tax law, complications. For instance when individuals are required to live away from their property in 'job related' accommodation. In these cases it is possible for them to nominate a property they own as their main residence, despite living elsewhere.

Examples of where this might occur are for a:

* pub landlord

* care worker

* agricultural worker

* vicar

Frequently the case arises where somebody buys a home and then has to move because of work, etc. In this situation they decide to rent out their house and therefore on disposal will not have lived in the property for their entire time of ownership. How does this affect their exemption status?

For a start, where a property was rented out prior to 31 March 1982, this period of non-qualifying use is ignored. The tax regulations allows for the proportion of the capital gain to be exempt where the conditions pertaining to primary residence are met. In other words the following equation applies where the period of qualifying use being that period where the property qualifies as the person's private residence or benefits from one of more of the stated exemptions.

Period of qualifying use/total period of ownership * (multiply) indexed gain

Finally, if you have lived at any stage in the property as your main residence, then the last three years of ownership qualify for exemption. This even applies when the period of occupation occurred prior to 31 March 1982.

The implications of this are that if you have a property with a large potential capital gain, derived during the last 3 years. Where you have not lived in the property before, you may want to consider moving into it as your main residence to reduce your tax liability.

Other exemptions of Private Residence Relief (PRR) that may apply are in circumstances where individuals are required to work away from home. If you think this may apply to you I would obtain a specialist tax text or consult a professional tax adviser as the matter can get very complex.

Alternatively try the practitioner's zone on the HMRC website. For further details on tax matters have a look at http://www.propertyhawk.co.uk for advice and the latest developments.

What is the rate of CGT?

This depends on what your income tax rate is. Any net gains are worked out after allowing for deductions and allowances. These are then added to your income tax liability. The rate charged corresponds to what would be payable if the sum was derived as income.

Some tax saving tips

I've listed below a number of tax savings tips that hopefully you will find useful. For more detailed advice on tax have a look at our tax professionals in the Recommended Links or go to the Landlords Bible.

You don't have to actually have completed a sale. The deal must have reached a point of no return. In technical terms, you must have an 'unconditional contract' for sale. This usually means that contracts have been exchanged and a completion date set.

Think about exploiting, the tax loophole, which allows you to remortgage your home and let it out using the funds to purchase a new home.

This little known loophole was brought about by technical changes in the 04-05 budget. For example, an owner-occupier bought a house for £150,000 using a £120,000 mortgage. The owner now wants to move but also to hold onto this property now worth 250k. Interest on the 120k and up to an additional 130k to enable him to withdraw his equity in the property can be all treated as an allowable expense for tax purposes and be offset against rental income.

Ensure that you claim or your allowances and expenses. Think creatively but realistically.

Capital Gains Tax deferment.

The Chancellor in his efforts to encourage investment in small businesses has created a mechanism to defer paying capital gains tax. Companies can now be set up under the umbrella Enterprise Initiative Scheme as qualifying investments. Investments in these companies allow investors to defer paying CGT and basic rate income tax.

How does it work? Let's start with the example where a property is sold realising a capital gain of £100,000 after allowances and deductions. The owner, as a top rate income tax payer would be liable to pay £40,000 CGT. However, they decide to invest the receipts of £100,000 into a EIS company. Following the approval of the investment by the Revenue the individual receives back the £40,000 back in tax. This means that for this £60,000 of funds the investor receives £100,000 worth of shares.

It gets better! It's also possible where you do not own the company to benefit from income tax relief at the basic rate of 20%. In this situation you would therefore receive £100,000 of shares for a £40,000 net investment. The bad news is that if you sell within 3 years the income tax relief is withdrawn & also you will not benefit from the exemption from capital gains in the share price made during that time.

Should you sell the shares at any stage the original CGT which was deferred is 'crystallised' and the tax will have to repaid. However, as long as you retain the investments or roll them over into another qualify investment the liability remains deferred. A word of warning through. Saving tax by putting money into a good investment can be an efficient way of investing money. However, putting your funds into a poor investment that goes bust will just means that you end up loosing your money as well as the 'taxman's'!

Allowable expenses

Often confusion arises over eligibility of items of expenditure allowable as an expense when calculating income tax liabilities. I have therefore listed below a number of these items under the headings; non allowable and allowable expenses:

Non allowable

1. fees in purchasing the property - included in the base cost when calculating any potential capital gain

2. expenses in connection with the first letting of a property for more than one year

3. repairs covered by insurance. Where a repair is covered then it is only the excess that should be claimed as an expense

4. replacement of a 'bog standard' kitchen with a 'top of the range' bespoke designer kitchen - classed as capital expenditure. See HMRC website's property income manual in the Practitioners Zone for detailed guidance and explanation on repair, reconstruction & improvement.

5. architect or building regulation application to alter property - classed as a capital cost

6. capital expenditure of providing the means of travel (normally a car) is not allowable as a deduction.

Allowable
1. costs of remortgaging a rental property such as surveyors, solicitors and mortgage brokers fees

2. fees received in evicting a tenant where a property is to be re-let

3. accountants fees!

4. cost of any services provided e.g. laundry, gardening and porter.

5. ground rents

6. any interest payable including personal loans and overdrafts which have been used to fund the investment

7. UPVC double glazed windows are now classed as a repair & therefore a revenue item even where they replace single glazing units.

8. costs of evictions e.g. legal costs, court costs, investigations

9. subscription to landlord organisations

10. 'revenue costs' of a car (the running costs e.g. fuel, road tax) of trips to rented property, it must be your primary purpose to visit the rental property. However, as the Revenue put it, if you stop off on the way to collect a paper this is ok! Where as if you set off to buy a paper and then visit a property on the way this is not. I think we all now how landlords would perceive this particular journey.

Reduce Capital Gains Tax in the Sale of a Business

Hopefully, before selling a business, you meet with a CPA or tax accountant and get an estimate on how much of your proceeds will be going directly to Uncle Sam if you pay them in a lump sum at time of sale. You don't want to save this surprise for after all is said and done, because not only will it most likely be a shock, but you will have given up your chance to do anything about it.

Planning is everything. For this article I will assume you are not doing a 1031 business exchange, that is selling your business and buying another similar business taking into consideration all the IRS guidelines and timelines. It's pretty rare to see this, but it can defer all of your capital gains tax if done correctly. A 1031 Exchange is more commonly implemented with real estate.

Depending on how the business is sold, the gains may be taxed as long term capital gain, short term capital gain, ordinary income, etc. and if you are selling an asset in a C-Corp you may face double taxation. So, the idea is to minimize your tax bill and maximize your proceeds no matter what situation you are in.

One option is with a Self Directed Installment Sale. The structure must be in place before the buy/sell agreement is signed. The gist is to receive the sale proceeds in installments and only pay capital gains tax as you receive the income. This has the effect of allowing the majority of money you would have paid immediately in taxes to continue earning compounded interest for you for many years, thus increasing your bottom line by a significant amount.

The details are a bit too complex to fully outline in a short article, but both an LLC and a Trust are created for you and set up meet IRS criteria for favorable taxation of installment sales. Your asset gets transferred to the LLC prior to sale, and your buyer purchases from your LLC. The trust buys the shares of your LLC from you via an installment agreement and you pay taxes on your gain only as you receive the payments.

You, the seller, are able to control when the payments begin and how long they will be spread out. This allows for maximum flexibility to control your income, and plan for future tax savings as well. Since your buyer paid cash in exchange for your property, you are not dependent on them to make the installment payments and you have transferred the risk of refinance or default. This is done by using an independent third party administrator and your money is safely invested in a principle protected insurance product to be used solely for the purpose of paying the installments.

If you pass on before receiving all of the payments due, the remainder of the installment payments pass to the beneficiaries of your choice.

Seeing an example of a taxed sale vs. a Self Directed Installment Sale side by side will show you how much of a difference in overall return this strategy will provide. This can make the process of the sale more palatable and provide a dependable income stream for retirement.

The tax benefit of this approach is similar to your 401K or IRA account. You reduce your current income by the amount of your annual contribution and thus defer the tax you would have paid on that income amount. Those funds are invested in stocks and bonds and grow in value, sometimes dramatically, for the period before you retire and start taking distributions. When you start distributions, the amount is treated as ordinary income and you are taxed at your much lower (you are no longer working and earning a big salary) income tax rate at the time.

The Self Directed Installment Sale allows you to similarly defer your capital gains tax from the sale of your business. Instead of paying all of your capital gains at time of sale, you set up your SDIS to pay out your sale proceeds over time. If you pay all of your capital gains tax at time of sale, that money is gone forever. However, with this vehicle, you spread your receipt of the sales proceeds out over, 15 years for example. When you receive your distribution, you are then taxed for the portion of that distribution that is attributed to the capital gains - generally about 15%.

The difference in after tax proceeds are dramatic and are demonstrated by a complex analysis called an illustration. I will try in an abbreviated fashion, however, to demonstrate the potential impact. If you sold your business and you had a capital gain of $3.46 million, your lump sum capital gains tax payment at a 15% rate would be $519,000. In the SDIS you would keep the entire sale proceeds of $3.46 million and take distributions over a 20 year period or whatever period you chose. You receive an annual payment over 20 years, that would consist of 1/20 of the principal, 1/20 of the capital gains, plus investment returns.

If we did an illustration of this case and compared selling the business and paying all the capital gains up front and invested the remaining proceeds in a 6.85% compound growth portfolio versus the SDIS paying 1/20 of the capital gains annually, you would gain an $831,000 advantage in after tax proceeds. Not to bad for a little advanced planning.

Investment Property Jargon Explained - Capital Gains Tax

The second in our series of articles about investment property jargon looks at capital gains tax.

If you successfully make money through buying and selling an investment property you'll want to hold on to as much of that profit as possible. So a thorough understanding of capital gains tax is essential.

The concept of capital gains tax is much the same in any country or market, it is a way for the local fiscal authorities to raise cash from the profit made by investors in real estate, as well as other asset groups.

The gain in capital you make on your investment property is essentially the difference between the price you paid and the price you sell it at. In other words: the profit.

Usually, capital gains tax is calculated as a simple percentage of this profit, but it may be possible to deduct other expenses from the gain, which will bring the amount down, and with it, the tax you pay.

In some areas the rate of inflation will be taken into account too, allowing you to calculate the "real" gain in capital relative to the economy as a whole.

As with most tax laws, people have always sought loopholes or ways to avoid paying it. In less scrupulous markets it's possible that the reported sale price of some investment property is lower than the true amount, thus reducing the investor's tax burden.

In countries where the sector is poorly regulated or policed, it's possible that a large part of the purchase price is paid "under the table" in cash, so the reported transaction price is lower than the real amount.

In its simplest form, the equation to calculate capital gains tax on investment property is:

(Sell Price - Buy Price - Deductible Expenses) x Capital Gain Tax Percentage Rate.

Since capital gains tax regimes can vary significantly between different countries and property markets, it is well worth seeking out an experienced adviser, such as an accountant, notary or lawyer, who can guide you through the different solutions.

If possible, find someone that is familiar with investment property in particular, since the rules for taxing real estate may be different to those for other types of assets with gains in capital.

The money they save you could pay for their services many times over in some cases, so it is well worth seeking their advice. For example, they may have tips on how to structure your deal so you can maximize the deductible expenses that you can subtract, or find a way of charging a lower tax rate on your capital gain.

Either way it's very simple: the more you can save on capital gains tax the more you can make on the sale of your investment property.

Investment Capital Gains

Have you bought any mutual funds this year or late last year while the market was doing its skyrocket thing? Last year it was hard to lose money. This year it has been easy.

You should be calling your mutual fund (they all have 800 numbers) to find out if and when they plan to pay their capital gains and dividends. You might say to yourself, they won't be paying anything this year because the fund is selling for less now than it did at the beginning of the year. Think again. It is very probable that the mutual fund manager took profits on many high flyers that he bought cheap last year. According to the way funds are set up those profits are taxable to holders of the mutual fund and not to the fund itself.

It is possible you bought a fund at $40 per share that is now selling at $30 per share and be hit with a 25% capital gains distribution of $10. On paper you now have a $10 per share loss and a tax bill based on the $10 per share distribution. That is adding injury to insult.

With this as a possible scenario it might be prudent to sell your fund for less than you paid for it. You should work the numbers with your accountant to see if this might reduce your tax bill. But you have to do it now. You can't wait until after the mutual fund declares its capital gains distribution. This is especially true if you have purchased any high tech or international funds during the past year. You can carry losses forward to next year to offset against profits and distributions next year.

The greatest numbers of mutual funds declare these distributions near the end of the year, usually starting in November with most of them in December. The rumors I hear are that the distributions will be early this year because of the poor performance of the majority of funds.

This applies to everyone who does not have a tax shelter of some kind such as a 401k, IRA, SEP or other similar investment vehicle.

One piece of advice I want you to heed. Don't buy any mutual funds now because they are "cheap". Wait until after they declare their capital gains and dividend distributions. You could be whacked with a big tax bill.

How To Avoid Capital Gains Tax By Moving Overseas

If you want to avoid UK capital gains tax by moving overseas it's usually necessary to remain non-resident for five complete tax years. Any gains on assets disposed of after you leave the UK will then escape UK capital gains tax completely.

The other side of the coin though is that you'll want to avoid or at least minimise any tax charges overseas. There's no point saving UK tax at say 20% but then incurring tax overseas at 30%!

This is particularly the case when there are reliefs that will apply to reduce any gain for UK tax purposes. The main reliefs that I'm thinking of here could include:

· A disposal of your home. The UK provides for a full tax exemption on the disposal of your main residence (assuming it's been your main residence throughout your period of ownership). Other countries aren't as generous and could only provide for a deferral (eg Spain which provides for a form of rollover relief to defer the gain when you buy another main residence).

· Business assets. Examples here are properties that have been let to a trader. These could qualify for taper relief of 75%. This means that a higher rate taxpayer would have a CGT charge of 10% - which is very low even by international standards

· Gambling winnings - tax free in the UK but not so elsewhere

· Most debts are tax free in the UK - not so elsewhere

· Assets held long term. Any assets held for at least ten years will in any case qualify for maximum non business asset taper relief. This will reduce the effective CGT charge for a higher rate taxpayer to 24% and not 40%

Therefore this makes it very important to ensure that any overseas jurisdiction you choose offer a CGT free or low CGT environment.

Low CGT jurisdictions

Italy 20%

Ireland 20%

Japan 20%

Croatia 25%

China 20%

Spain 18%

However when looking at these you need to bear in mind the opportunities above for low UK CGT rates.

CGT free jurisdictions

If you want to avoid CGT in full there are plenty of these to choose from. Some of the most famous countries with no CGT or can offer a CGT free environment for expats with correct planning include:

Gibraltar

Malta

Andorra

Monaco

Isle of Man

Channel Islands

Cyprus

If you're thinking about moving overseas to avoid CGT you should ensure that you take detailed advice. If you're interested in more articles on moving overseas and avoiding UK CGT visit http://www.wealthprotectionreport.co.uk for further details of offshore tax planning opportunities.

How Does Capital Gains Tax Work?

In Australia, a comprehensive capital gains tax regime generally applies to events that happen to capital gains tax assets acquired by taxpayer after 19 September 1985. The provisions of the law which implements this change in the way in the tax operates in Australia found in the income tax assessment legislation. Parts 3.1 and 3.3 of this legislation other major rules for this type of tax. The provisions of the law are what are called catchall provisions. They apply to all gains that arise as a result of the event happening whether or not the gains of the capital nature, subject to certain exemptions and exceptions, and a territorial and temporal limitations. However, where a gain arises from an event and an amount is also assessable under some other Parisian, double taxation is avoided by reducing or eliminating the amount of the gain.

The rules that govern this tax affected taxpayers income tax liability because assessable income includes a net capital gain for the income year. In a capital gain is the total of the taxpayer's capital gains from income year, reduced by certain capital losses made by the taxpayer. A capital loss cannot be deducted from taxpayers sensible income, but it can reduce gains in the current income year or in later in the next year. The amount of a game made on or after 21 September 1999 may be discounted by 50% from individual trust or by one third to certain superannuation funds and life insurance companies from capital gains tax assets that a virtual assets. No discount is allowed to capital gains made by company generally or buy life insurance company from its nonvirtual assets. A company can only offset a net capital loss against the game if it passes either the continuity of ownership test or the same business test in relation to both the capital loss year, the capital gain in and in the intervening years. Further, if it fails both the continuity of ownership test and the same business test in income year, the company must work out their gains and losses in a special way. It is very important to understand how this type of tax can work because you could sell a large assets thinking that you'll recoup a large amount of money from it and not realise that you will actually be incurring a large tax bill.

Residential Capital Gains Strategy For 2009 - Impact of New Law

If you have turned your primary residence into a rental, a second home or a vacation home and are planning to sell it, you should be aware of a new law that changes how capital gains are calculated beginning January 1, 2009. You may want to change your strategy while there is still time.

The Current Law.

Currently, the law excludes up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a primary residence. The sale of a home qualifies for this exclusion if the home was the primary residence of the tax payer for at least two of the five years ending on the date of sale or exchange. The exclusion applies even if the home was originally purchased as a second home.

The New Law.

Rethink your strategy because on January 1, 2009, the rules will change. President Bush signed The Housing and Economic Recovery Act of 2008 (H.R. 3221) on July 30, 2008. The tax law name of this same law is The Housing Assistance Tax Act of 2008. This law will generate tax revenue by reducing the home sale exclusion, but it also provides a friendly transition for taxpayers.

The law does not allow a taxpayer to claim exclusion for any period of time after December 31, 2008, in which the home is not the main home of the taxpayer. The available exclusion is apportioned in the ratio that the period the home was the primary residence (qualifying use) bears to the period of ownership after December 31, 2008. Any nonqualifying use that occurred prior to January 1, 2009 is ignored. The maximum excludable amount remains at $250,000 or $500,000, depending on your marital status.

An Example.

If a homeowner purchased a house in 2009 for their main home, turned it into a rental property in 2012 and sold it 2014, the property would not have been used as a primary residence for 2 years of the five years it was owned (or 40% unqualified use). Under these circumstances, 40% of the gain realized from the sale would be subject to capital gains tax. The remaining 60% of the gain would be excluded up to the maximum amount allowed.

Temporary Absences.

Being absent from the property for temporary periods of time that are not greater than two years will not threaten the status of a home as a primary residence. A home can still be the primary residence of the taxpayer when he/she is absent because of a change in employment, health conditions or other unforeseeable circumstances.

Time Remains To Do Tax Planning.

Because the new law uses a test period of January 1, 2009 to the date of sale, the highest tax advantage is gained by using the home entirely as a primary residence during this period of time. Taxpayers who are planning to sell a vacation home, a second home or a rental home, may want to discuss with their tax advisors whether to move into the home on or before January 1, 2009, to accumulate as much qualifying use as possible before the home is sold. There is still time to do some planning to gain a tax benefit from this change.
This article is intended to be a general discussion of the topic area and is not to be considered as legal or tax advice for your specific circumstance. Always seek and rely upon the advice of a reputable accountant, tax advisor or tax attorney before taking any action about your personal situation.

This article is intended to be a general discussion of the topic area and is not to be considered as legal or tax advice for your specific circumstance. Always seek and rely upon the advice of a reputable accountant, tax advisor or tax attorney before taking any action about your personal situation.

French Property - Changes in Capital Gains Tax For Non-Residents

British owners of holiday homes in the Dordogne tend to think that French tax is irrelevant to them. It can come as a surprise when they're told on a sale that French capital gains tax will be payable. It comes as a further surprise when they learn the conditions for deductible capital expenditure. But the real sting in the tail is paying someone else to validate the figures they produce.

The basic principle

Capital gains tax is levied on the difference between the purchase and sale prices, less allowable capital expenditure. The purchase price is increased by the agency commission and notarial fees in order to give the true cost of purchase. The sale price is reduced by expenses incurred in connection with the sale - principally the survey costs associated with the obligatory "seller's pack".

The difference between these two figures will produce the gross capital gain.

Deductible expenditure

A vendor will be able to deduct from the gross capital gain certain capital expenditure - subject to conditions.

First, the expenditure must relate to "construction, reconstruction, enlargement or improvement". Construction, reconstruction and enlargement are easily understood: they will cover the extension or rebuilding of a house or building. "Construction" will extend to the installation of a swimming-pool.

The deceptive term is "improvement" - the French word used is "amelioration". You would have thought this broad enough to cover replacement kitchens and bathrooms. However, "improvement" is defined as installing equipment or raising the level of comfort without changing the structure of the property. Installing an elevator, central heating or air-conditioning are recognised as improvements, as would be the installation of a new bathroom. The refurbishment of an existing kitchen in that Dordogne home of yours may however not qualify.

Secondly, the work concerned must have been carried out by a French-registered tradesman. You cannot deduct materials you have purchased yourself - even if they are for use by the tradesman.

Thirdly, you must be able to produce supporting evidence of the expenditure in the form of invoices from the workmen concerned, and bank statements showing the payment.

If you are unable to meet these conditions, you can use instead a lump-sum allowance for expenses of 15% of the original purchase price, net of agency commission and notarial fees.

Deducting allowable capital expenditure from the gross capital gain brings you to a net figure.

Period of ownership

There is then a further allowance depending on the period of ownership. For every complete year of ownership after five years the gain is reduced by ten per cent. This means that if you own the property for fifteen years or more no capital gains tax will be payable in France.

Lump sum allowance

Once you have calculated the net capital gain you are allowed to deduct from it a fixed sum of 1,000 euros per individual owner - i.e. if the vendors are a married couple they will be able to deduct 2,000 euros.

Sting in the tail

Some of our British clients, selling their Dordogne homes, find the conditions for deductible expenses not only baffling but difficult to comply with - particularly where they have imported foreign labour or undertaken work themselves. Or they may simply not have retained the records needed by way of proof.

But the real sting in the tail comes with the requirement to appoint a French-resident tax representative in the case of all sales above a threshold of €150,000 - even if you are making a capital loss.

The tax representative assumes personal liability to the French tax authorities for the correctness of the return. And it goes without saying that he will charge a fee. In a recent straightforward case that we have had, a vendor selling at a considerable capital loss has had to pay the tax representative close to €1,000. If non-residents resent the system in the first place, the cost of a tax representative adds salt to the wound.

Distribution of Capital Gains and Dividends

The whole idea of investing is that every time the investor invests they expect to get a return on their in vestment. The concept of the mutual fund is one wanting to be grasped by most people, particularly what are the necessary procedures for getting their capital gains and dividends distributed.

The issue most times depend on the company you are involved with as they set the particular time of the when these funds can be distributed. The dividends are from the interest gained off the various securities put in place, and also from the portfolio itself. A lot of the companies doing trading will pay out certain dividends to their investors; meanwhile other companies will reinvest that particular sum and then in turn pay out a higher dividend at a later date.

Most of the times when an investor gets his or her return they are thinking that this is too small but they should be fully inclined with the rules of the particular contract that they signed, as there are taxable returns. The capital gains are the one's that are left for more than a year, all these securities have to be dealt with and a report given to the investor for proof of what transpired.

Capital gains are taxable by dealing with certain investments as if they were long term investments no matter how long they were purchased. As the necessary funds are being shared out they are reported on a special form known as the 1099-DIV. These procedures are required by law and are subject to a personal tax obligation on your part as the investor.

Capital Gains Taxes and Their Issues

Most people have been wondering about the issue of capital gains tax and directly the long term investments, this is applied to assets that are held for over one year and these are taxed at a lower rate that income. This capital tax goes up and down every era as it is not as steady as it should be, in the era of Reagan it was 28%, in the time of the Bush administration it was cut in half to about 15% and also now in this present day of Obama's presidency you are seeing a hike in it by about 8-9%, which is 22.9 percent for the capital tax and this works out to a 52% increase for the previous 15% tax rate.

During the era of Reagan the capital gains tax went up by 40%, this was because of the increase from 20 - 28%. These very high rates could in turn help to decrease to deficit for 2011 by $12.2 billion and 2014 by about $19.7 billion and so on. The whole capital gains tax is something not to play with as it is never yet steady and you wonder if and when they are going to put a hike on it.

The issue of the this tax is sparking heated debates and having people wonder if this is a positive or a negative change. The best thing to do is take notice of it before it gets too late, if there is an event of a tax increase then you will see property selling rapidly to and with a slit decrease in the prices.

The Tax Laws Favor Capital Gains Over Regular Income!

The government gives tax advantages to capital gains because investments build businesses that provide jobs.

Also, someone with investments is less likely to need government assistance in old age. As a result, traders and investors do not have to pay Social Security and Medicare taxes on stock profits.

Also, there are no taxes for buying stocks!

Taxes do not become a consideration for traders and investors until they sell a stock or fund. At that point, they either have a capital gain or capital loss.

For every sale, you need to figure out which shares were sold.

This information is called the Cost Basis, and is important for figuring out if the sale results in a gain or loss, as well as whether the gain or loss is long term or short term.

A capital gain or loss is Short Term if the sale happened less than a year and a day after the purchase - otherwise it is a Long Term gain or loss.

Long term capital gains are especially favored. While short term gains are taxed at the same rate as your regular income (currently up to 35%), long term gains are currently capped at a maximum rate of 15% (though this cap rises to 20% in 2011).

For stocks and ETFs, you can choose two options for figuring out the cost basis: "First in, First Out" (FIFO) or Specific Shares.

For mutual funds, you have three options: FIFO, Specific Shares, or Average Cost.

You cannot use the Average Cost method for stocks and ETFs.

Paying Capital Gains in Real Estate

Let's start this out by learning what a capital gain is. A capital gain is considered the difference between what you paid for your investment and what you received as a return on that same investment.

The United States government already offers many homeowners all kinds of tax breaks. The biggest ones are the property tax deductions and the mortgage interest. Now if you're a home seller you also have a great advantage. You won't owe the government anything off the sale of your home. The way it works is like this. When you decide to sell your home and your single you can make up to a $250,000 profit and not have to worry about paying any capital gain taxes. What's even better is if you're married you can make up to $500,000 in profit and not owe a dime. Many home sellers are shocked by this huge break. You can utilize this new law an unlimited number of times. There are still some requirements that need to be met. The first requirement is the home has to be your principal residence. It doesn't apply to investment housing. You also must live in the home for at least two out of the five years prior to the sale of it.

The first step in the calculation of capital gains in Canada is you need to determine whether or not the property sold was capital property and then determine if the proceeds of this sale exceed the total sum of the adjusted cost base. Adjusted cost base along with the expenses that were incurred at the time of the sale. Claiming any type of reserve or any kind of capital gains deduction could have an affect on your capital gain reporting as well as your capital gain tax amount. If the payment will be received over several years claiming a reserve will allow you to report any capital gains from only the portion of the proceeds of the disposition you had received during that year. The lifetime total exemption for any person is $250,000. This isn't too bad especially if you made a small investment.

Capital Gains Tax Explained - CGT UK Checklist and How To Pay CGT

Capital Gains Tax ( CGT)

What is CGT?

It is a tax imposed by the government on individuals who make a gain by selling assets other than their main home, such as making a profit on stocks or profiting from properties which are bought for the purpose of resale.

Why is it important to know about CGT?

You may end up receiving a hefty bill on your personal earnings as each year the CGT tax alone contributes arround 3 billion pounds a year to HM Revenue and customs.
Who is liable to Pay CGT

All UK residents are subject to CGT if they make a gain over the given limit.

Whats the CGT exemption limit?

In the last 10 years CGT allowance has risen from just 6500 to 9200, which means anything earned outside the 9200 bracket will be held liable for CGT.

Secondly exemption applies on assets such as your

* Personal home

* Premium Bonds

* Stocks and shares held in ISAs or PEPs

* Child Trust Funds

* National Savings Certificates

* Personal Cars and posessions worth upto 6000

* Also in the event of death the assets belonging to a person are not liable to CGT

When is CGT Paid?

This is payable on 31st January following the end of the tax year in which the gain has been made.

Any Concessions under CGT?

Taper Relief policy has been made available to precisely calculate and reduce the amount of CGT by assessing the duration the asset has been kept.
How to pay GCT?

All gains made over the set government limit must be reported to HM Revenue & Customs.
For further help and guidance hmrc.gov.uk has detailed information and reliefs available on CGT.

French Capital Gains Tax Increase For Home-Owners

All sales of French second homes completing after 1st January 2011 will be subject to capital gains tax at the new rate of 19% instead of the existing rate of 16%. This is part of the French government's attempt to raise extra revenue to resolve their national indebtedness.

There have been debates in the French Parliament relating to other reforms of the capital gains tax regime, but it does not so far appear that they are to be implemented. This means that the existing regime will be continued, under which the taxable capital gain is reduced by 10% for each complete year of ownership after five years, resulting in a sale being tax-free if a property is owned for fifteen years or more.

Deductible Capital Expenditure

Capital expenditure that can be set against the gain remains limited to expenses arising from building, rebuilding, enlargement or improvement. The improvement category is restrictively interpreted. It relates to expenditure intended to raise the comfort level of the property without changing the structure of the building, such as the installation of a lift, central heating or air condition and work improving insulation. It is unlikely that replacement of items such as an existing kitchen or bathroom will be covered. On the other hand, the installation of a new bathroom probably would be.

To be deductible, expenses have to be supported with both invoices from registered French tradesmen and evidence of payment of the same in the form of bank statements showing the payment concerned.

UK Capital Gains Tax Liability

UK residents will also have to account to the Inland Revenue for capital gains arising, and will be able to set off French tax paid. Since the French rate of 19% will exceed the UK base rate of 18%, no UK tax will be payable. However, where the higher UK rate of 28% becomes applicable, local advice needs to be taken about the ability to set off capital expenditure disallowed under French rules, as well as the French tax paid.

Tax Representative

To add insult to injury, non-resident sellers of second homes for a price in excess of €150,000 will also have to appoint a tax representative, at a cost of at least €1,000, even if they are making a loss.