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Tax on home gains: Not so simple

27th Jan 2017
Tax Writer Taxwriter Ltd
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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.

Rate proliferation

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.   

Residential property

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.

Example

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.

Whole gain: £
Proceeds 400,000
Cost of land (50,000)
Cost of house (150,000)
Taxable gain: 200,000
Residential property: 16/20 years 160,000
Field: 4/20 years 40,000
 
Residential property 160,000
Less annual exemption: (11,100)
Taxable gain 148,900
Taxed at higher rate: 28% £41,692
 
Non-residential property 40,000
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%.

Replies (7)

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By Justin Bryant
30th Jan 2017 10:59

Agreed. It is ridiculously complicated. Just doing a vanilla NRCGT return can easily take at least half a day getting all the info. etc.

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By Vaughan Blake1
30th Jan 2017 11:17

TBH this has always been unexpectedly complex at times.
Throw in an unmarried couple who own their own properties, sell one and replace it, then let one out, then get married etc etc.

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By michaelblake
01st Feb 2017 12:00

All good points Rebecca. As I noted in my article on this subject in Taxation Magazine some weeks ago it is interesting to speculate what might constitute a "just and reasonable" apportionment of the gain where say a cottage that has formed part of 1,000 acre farm has been disposed off, and the disposal is treated as a part disposal of the farm. HMRC might argue that the apportionment should be on a value basis, or some other method, but why not an area basis which might mean that the percentage of the asset (the farm) that had been used for residential purposes was very small and produce a much better result for the taxpayer. There is nothing "just and reasonable" about adopting a method that produces the best result for the exchequer in my view.

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By gogabz51
01st Feb 2017 12:50

If the value of the field in Rebecca Cave's example had increased prior to building the house, say to £120,000 (& assuming there was something to support that value), would it be possible to calculate the gain on the land on its own separately from the final property?

In this case - gain on land £70,000, taxable @ 20% = £14,000;

gain on residential property £400,000 minus £(120,000+150,000) = £130,000, minus exemption £11,100, taxable @28% = £33,292;

total CGT payable = £47,292? (i.e. a saving 0f £2,400 from moving £30,000 of the gain from residential @ 28% to non-residential @20%)

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By North East Accountant
02nd Feb 2017 08:58

To add to complexity we also need to consider has the taxpayer had a period of Non UK Residence, since 6 April 2015.

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By cfield
03rd Feb 2017 00:40

I always thought a paddock could be treated as part of the garden and grounds (assuming it was within the permitted area) unless there was significant business or agricultural use.

For instance, if you kept your own horses there, it would qualify for the PPR exemption (if applicable) but if you charged other people for keeping their horses there, it wouldn't.

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By ashmm
01st Mar 2017 22:30

Does anyone have any experience in dealing with overseas property gains and how it can be re-invested in purchasing a property in the UK tax efficiently?

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