Tax on home gains: Not so simple
Gains arising from residential property can be subject to up to four different rates of CGT, and in some circumstances the gain must be apportioned between those rates.
The rates of capital gain tax (CGT) were reduced for disposals made on and after 6 April 2016; from 18% to 10% for gains which fall within the taxpayer’s basic rate band, and from 28% to 20% for other gains. But the higher rates were retained for residential property gains and also for gains from carried interest, which I do not discuss here.
So we have four different rates of CGT to grapple with: 10%, 18%, 20% and 28%, and two criteria: the extent of the taxpayer’s basic rate, and whether the property qualifies as residential or not.
A new schedule 4ZZC has been added to TCGA 1992 to define what is meant by a residential property interest.
Essentially any property which has been a dwelling at any time while the taxpayer owned it, is a residential property. A dwelling is not defined, but communal residential properties are excluded from the definition such as prisons, hospitals, hotels, boarding schools and army barracks.
However, the law also allows the gain to be apportioned on a time basis if there has been a change in use of the property. For example, a home may be constructed on bare land, or destroyed, or fall into disrepair so it can no longer be considered to be a dwelling.
Sam acquired a field in May 1996 for £50,000 and in May 2000 he completed a house on the land for a total cost of £150,000. He sold the whole property in May 2016 for £400,000. The property was owned for 20 years, and the house existed for 16 years. The total gain must be calculated first, then apportioned on a time basis between the two periods.
The gains relating to the period before the house was completed must be taxed at the lower rates of CGT, and the gains relating to later period when the entire property consisted of a dwelling plus garden, must be taxed at the higher rates of CGT. Sam can choose where to set-off his annual exemption. He has no basic rate band available.
|Cost of land||(50,000)|
|Cost of house||(150,000)|
|Residential property: 16/20 years||160,000|
|Field: 4/20 years||40,000|
|Less annual exemption:||(11,100)|
|Taxed at higher rate: 28%||£41,692|
|Taxed at lower rate: 20%||£8,000|
Total CGT payable: £49,692
Mixed use property
A property may consist partly of residential (a dwelling plus gardens), and non-residential (for example, a paddock) concurrently. In such cases the total gain must be apportioned between the residential and non-residents parts on a just a reasonable basis. Note: There is no automatic inclusion or exclusion of land from the residential part, as applies with the “permitted area” test used for the exemption of gains for the taxpayer’s main home (TCGA 1992, s 222).
The taxpayer will need to keep records of the use of any land attached to a residence to demonstrate whether it was used as gardens or grounds with the residence or not, and hence whether it should be subject to the higher rates of CGT or not. Where the property has very substantial grounds, the taxpayer may be torn between trying to prove an area greater than half a hectare (normal permitted area), is used with the home, and hence qualifies for 100% exemption from CGT, or that is not used with the residence and hence qualifies for the lower rates of CGT.
Furnished holiday lettings
When a property which has been let out is sold, the higher rates of CGT will apply if the property is residential. This applies to property used as furnished holiday lettings (FHL), as it does to other buy to let homes. Although gains made from disposing of a FHL business can qualify for entrepreneurs’ relief, in which case the rate of CGT will be 10%.