How much capital gains tax should I pay on a buy-to-let property?

theguardian.com:

Q I hope you can help with my tricky problem! A friend and I bought a buy-to-let property jointly in April 2002 for £52,000 using a 100% interest-only mortgage. By August 2004 the value had risen considerably, and I paid my friend £25,000 to buy out his 50% share, as well as taking over the mortgage (still £52,000) in my sole name. I have just sold the property for £140,000 and am struggling to find out what purchase price I should use to calculate the capital gain. The sensible figure for me would be £77,000 (the £52,000 we jointly paid plus the £25,000 I paid my friend for his half), but is that correct? DB

A No, I don’t think it is correct. To calculate the gain, you use the amount you originally paid for the property and deduct that from what you got for the property. So in your case the gain is £88,000 – that is £140,000 minus £52,000. But you can reduce that £88,000 by deducting money spent buying and selling the property which includes things such as solicitor, broker and estate agents’ fees as well as stamp duty land tax (SDLT) and the cost of building work which increased the value of the property but not simple redecoration.

Your friend may not be pleased to know this, but he may have underpaid capital gains tax (CGT) when he sold his share. The £25,000 you paid him comes into play in calculating his gain on disposing of his half share and getting you to take over his half of the mortgage. His calculation would be £51,000 (the £25,000 cash he got plus £26,000 which is half the mortgage) minus £26,000 (half the purchase cost) less costs of buying and selling. So his gain was a maximum £25,000 although in reality less than that because of buying and selling costs. In both your case and your friend’s – and assuming