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Allowable absence, letting and CGT

Allowable absence, letting and CGT

Someone has just phoned to ask me capital gains tax advice on a property that used to be her PPR until she and her husband (although they weren't married at the time) moved to Australia. They have now returned to the UK and are living in the property. She phoned HMRC twice and was told both times that she would have no CGT to pay when she sells the house as she was working in Australia and it was thus an allowable absence.

My view is that allowable absence only counts if you leave the UK in order to work overseas by prior arrangement, not if you emigrate and then find a new job out there. But maybe I'm wrong - does anyone else know for sure?

As far as CGT goes, I don't think it makes any difference in her case, because even if it was an allowable absence, the fact that she let the property out the whole time she was away would make it taxable for this period anyway, even if it was still her PPR. After all, if she had let out part of the house whilst still living there, that would create a CGT liability on the percentage let out, unless (I believe) it was covered by the rent-a-room exemption (although I may be wrong about this).

It worries me that HMRC give out that sort of advice without knowing the full facts, which then flies in the face of what I told her.

Useful comments on this would be appreciated.

Chris 

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03rd Jan 2012 13:41

hmm

Chris

I dont think you have that quite right. You can get the absence if you move back into the same property after you come back (the legislation doesn't specify when, just that you move back after you come back). TCGA 1992 S223(3)

http://www.hmrc.gov.uk/manuals/cgmanual/cg65030.htm

There are various reasons you can have too, ie temporary absence and working overseas etc.

From memory I dont think lettings matters so long as you are not trying to claim another PPR at the same time elsewhere.

This is a complex area if you are not familiar with it, and the legislation does differ from HMRC's manual so I would read that too. Its not very long, and I dont think it mentions anything about when the employment was arranged.

Also consider that even without the relief, with lettings relief etc she may well have a minimal tax bill.

What I can say is HMRC cant possibly have advised without knowing the full facts.

Regards,

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By ACDWebb
03rd Jan 2012 13:43

They are referring to

the extension in TCGA s223(4)(b). You might want to consider the definition of “period of absence” in s223(7) and whether that presents any problem.

The legislation only says "any period of absence throughout which the individual worked in an employment or office all the duties of which were performed outside the United Kingdom". Nothing about that being by "prior arrangement"

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By cfield
03rd Jan 2012 14:10

Period of absence

Yes, I see what you mean about that, although I thought there might be a rule preventing people from using that exemption when they emigrate.

By the way, she was absent for more than 3 years so is not entitled to the general exemption re absences for any reason.

Her husband also owns a UK property which he was letting out so I guess we need to make sure he does not claim PPR on that, as obviously they only get one PPR between them. No election has been made by the way.

It seems that letting to one lodger is exempt but not to more than one at a time. This is probably where I got the rent-a-room connection from although obviously it is not an exemption in its own right. Does this mean that you can incur CGT on letting a room to a couple, but not to a single person?

We haven't actually got round to discussing figures yet so not sure if there will be a tax bill anyway once improvements, expenses, letting relief and annual exemption are taken into account. I will only be delving into these areas once it becomes a paid engagement!

Chris

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By ACDWebb
SteLacca
03rd Jan 2012 14:34

@cfield

cfield wrote:

A By the way, she was absent for more than 3 years so is not entitled to the general exemption re absences for any reason.

B Her husband also owns a UK property which he was letting out so I guess we need to make sure he does not claim PPR on that, as obviously they only get one PPR between them. No election has been made by the way.

C It seems that letting to one lodger is exempt but not to more than one at a time. This is probably where I got the rent-a-room connection from although obviously it is not an exemption in its own right. Does this mean that you can incur CGT on letting a room to a couple, but not to a single person?

A Not necessarily. They are separate sections and 223(3)(a) does say "and in addition"

B Yes though you say "they weren't married at the time" so there may be something there for both

C not sure where you are getting this from, other than conflating the Rent a Room relief rules. 223(4) applies "Where a gain to which section 222 applies accrues to any individual and the dwelling-house in question ... is or has at any time in his period of ownership been wholly or partly let by him as residential accommodation" Nothing there about the number of people it was let to.

 

The only restriction on someone emigrating is that none of the extensions in 223(3) would apply as there would not be periods of use as PPR before and after

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03rd Jan 2012 15:28

Whose side are you on ?

But Chris, why would they want to employ you ?

From your comments it seems clear that you are determined to make them pay as much tax as possible -  and then charge them for the privilege !! 

It may come as a surprise but many clients prefer accountants who work for them and not HMRC. Your job is to find ways to minimise the amount of tax they pay, not trawl through and reinterpret legislation in a bid to increase their bill.

 

 

 

  

 

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By cfield
03rd Jan 2012 15:35

Lodgers

I got it from the following passage:

Restrictions to the relief

You might not get the full amount of relief if:

The garden or grounds, including the site of the house, are larger than 5,000 square metres (roughly the size of a football pitch).You've used any part of your home exclusively for business purposes.You’ve let out all or part of your home (or taken in more than one lodger at a time). But you may be entitled to Letting Relief instead - see the section 'Letting all or part of your home' below. The main reason you bought it was to make a profit from a quick sale.

which was on the following page on their website:

http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm#2 

Not as irrefutable as the actual legislation of course, but I knew there was something that exempted gains relating to lodgers.

Re absences, doesn't each one have to be both preceded and followed by actual occupation? I don't think they can both run together.

Re PPR, both properties should qualify up to the date they got married unless he had any others. I was thinking only of the time since then, but as he is still letting it out I don't think this will be an issue. They should both get the last 3 years anyway.

Chris

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By cfield
03rd Jan 2012 15:44

Such rubbish!

"From your comments it seems clear that you are determined to make them pay as much tax as possible -  and then charge them for the privilege !!  "

Some people talk such utter tosh.

Of course I want to minimise their tax bill, but not at the expense of falling foul of the tax rules. That's the tightrope we all have to walk, usually with great success. There's no point in saying no tax is due and then finding out later there was!

Obviously you think that you can let a house out and there are no CGT implications at all. I only hope you are not a tax advisor!

I did say "useful comments appreciated". Your comments are not in the least bit useful. Go away and annoy someone on another strand.

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03rd Jan 2012 16:31

.

Chris,

If this is a new client I would go with a "its complicated, £750 to explain why in a report" type answer myself.

I think from your earlier posts you are quite new to practice (2 years?) you should find you get heaps of enquires at this time of year as established practices will have battened down the hatches and be telling all comers to get lost until Feb.  In my first couple of years i picked up loads of tax work at this time of year as no-one else would do it.

rgds,

 

 

 

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By cfield
richardterhorst
03rd Jan 2012 17:26

If only........

I wish I could get £750 for advising on this. In reality, the enquirer would probably baulk at that price and try to work it out herself from the info already given.

I quoted a fixed fee for a lot less than that (guess I will have to cover the VAT too) but I see it as a carrot that will hopefully generate a bit more work in the future.

True, I've only been posting on AWeb for a couple of years, but have been practising for longer. It's just that for the first few years I worked for a few large clients (including my old day job) and got bogged down on too much routine stuff. For the last couple of years I've been actively seeking out higher paid work, and see AWeb as a great sounding board for those grey areas we all come across. But I probably spend more time on it than I should answering other people's queries rather than posing questions myself. It's like a drug - I just can't help advising!

Like you, I see January as an opportunity to pick up work no one else has time to do. Fees are higher at this time of year so it is very worthwhile if you can afford the time. I've even put a guarantee on my website promising to file by 31 Jan if they get the info to me by the 27th. The only problem of course is trying to get it ranked high enough for people to see!

Chris

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04th Jan 2012 15:35

Send me £750 immediately

 @ireallyshouldkn...

I'd like to tell you why you are wrong, but unfortunately it's really complicated. However, send me £750 and I'll explain all in a report. If you don't follow your own advice and do this immediately, then why should you expect Chris to follow this slightly bizarre marketing technique ?  

As for Chris, you may be sticking to the rules, but it's clear from your original enquiry that, whether you realise it or not, your mindset is biased in favour of HMRC. Good accountants - by which I mean accountants who are successful - always, always favour their clients. While also knowing tax law inside out,and sticking to the letter of the law, they adopt a pro active postive approach, rather than seeking out ways to increase taxation.  Have a look at your competitors to see what I mean. Customers don't want to hear problems, they want to hear solutions to tax bills. It's a subtle but important distinction.   

But by all means, ignore this advice and act as you see fit.  

 

 

 

 

 

 

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04th Jan 2012 17:36

.

@ Mike I appreciate you enjoy a nice bit of trolling but I suggested the strategy because it works.  For me at least.  Just done something very similiar for just that fee in November (plus VAT of course) hence remembering for once the section number. Very happy client with all the risks explained in plain English with a heap of worked examples. 

@ Chris, dont undersell yourself. I did a lot of that in the first few years and was told several times to not to! Tax advice should be the premium product not the loss leader. Many clients are happy to pay good money for a solid well researched answer once they realise its not one of those you can answer in 30 seconds. The trick is how you sell it which will take time to develop. Those that dont value your advice are not worth having.  I dont take on the Jan crowd anymore (just about finished firing them as they tend to come late each year!) but some can be retrained!

 

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By cfield
06th Jan 2012 13:06

Problem solved

I've now resolved this query. As mentioned in the 1st response, lettings don't matter so long as there is a qualifying absence.

See http://www.hmrc.gov.uk/manuals/cgmanual/cg65055.htm

The difficulty for most people is that an absence only qualifies if no other dwelling can be called your PPR whilst you are away.

According to Helpsheet 283 (bottom para on page 4) this can include rental properties. Unless you stay in hotels the whole time (or sleep on the park bench) it would be difficult not to have a PPR during an absence of any great length.

You can avoid this by nominating your UK property as your PPR within 2 years, as mentioned in the above para on Helpsheet 283 and also in the HMRC Manual:

See http://www.hmrc.gov.uk/manuals/cgmanual/CG65047.htm

Most people seconded overseas probably fail to do this. However there is a get-out under ESC D21 if you were genuinely unaware of the need to make an election:

See http://www.hmrc.gov.uk/manuals/cgmanual/CG64500.htm

The other thing to avoid is doing any work in the UK whatsoever whilst you are abroad. This might seem impossible at first sight, but many employees seconded abroad might come back for meetings, etc at their UK employer on short visits.

See http://www.hmrc.gov.uk/manuals/cgmanual/CG65041.htm

I ran all this past an HMRC inspector today and she agreed with my analysis. It seems my clients can indeed claim PPR whilst they were in Australia (on both properties up to the date they got married) and can still choose which is their PPR now (at least until they move in to one of them).

I suppose the best option for most people on long absences abroad is to sell the property and make sure they are gone for at least 5 complete tax years. That avoids any CGT liability at all.

But never let the tax tail wag the investment dog. If you want a foothold in the UK property market so you can afford a house when you get back, then obviously best to keep it and use the allowable absence exemption instead, even if it compromises any property you bought overseas which would otherwise have been your PPR.

Chris

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