When you’re considering to Buy Second Hand Car, it’s crucial to understand how depreciation works, especially when compared to buying a new vehicle. Many people are unaware of the different ways depreciation is calculated, and how it impacts potential tax implications down the line. Let’s break down how depreciation applies to a used car and what you should consider.
The common misconception is that depreciation for a second hand car is calculated in the same straightforward way as perhaps initially imagined – simply deducting a fixed percentage of the original purchase price each year. For example, someone might assume that if you buy a used car for £50,000 and depreciate it by 18% annually, you’d deduct £9,000 each year. Following this logic, after five years, you might think you’ve written off £45,000. However, this isn’t entirely accurate.
The reality is that depreciation on a used car typically follows a reducing balance method. Using the 18% figure mentioned, here’s how it actually works:
- Year 1: Starting value £50,000. Depreciate by 18% (£9,000). Closing value becomes £41,000.
- Year 2: Starting value is now the previous closing value, £41,000. Depreciate by 18% (£7,380). Closing value is approximately £33,620.
- Year 3: Starting value £33,620. Depreciate by 18% (£6,051.60). Closing value is approximately £27,568.40.
- Year 4: Starting value £27,568.40. Depreciate by 18% (£4,962.31). Closing value is approximately £22,606.09.
- Year 5: Starting value £22,606.09. Depreciate by 18% (£4,069.09). Closing value is approximately £18,537.
After five years, using the reducing balance method at 18%, you would have written down approximately £31,463, leaving the car’s book value at around £18,537.
This is significantly different from the initial, simpler calculation. Furthermore, it’s important to understand the tax implications when you eventually sell the vehicle. If you sell the used car for a price higher than its book value at that time, for instance, selling it for £25,000 after five years, you would record a profit. In this scenario, the profit would be £25,000 (selling price) – £18,537 (book value), which is £6,463. This profit would then be subject to tax.
In contrast, the depreciation rules can be different for a new car. In some cases, you might be able to write off a larger portion of the new car’s value in the first year itself. If you were able to write off the full £50,000 value of a new car in the first year, then upon selling it at any point thereafter, the entire sale price would likely be considered profit and taxable.
Therefore, when you buy second hand car, understanding the reducing balance depreciation method is vital for financial planning and anticipating future tax liabilities. It’s a different approach compared to the potential first-year write-off that might be available for new cars, and it has a direct impact on your finances over the years of ownership and when you decide to sell. Always consult with a financial advisor or tax professional for advice tailored to your specific circumstances when making decisions about vehicle purchases and depreciation.
