When do you pay Capital Gains Tax on a Property Sale? 1

One family house for sale

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

So it doesn’t apply to Property Developers, their profits are trading income not investment income.

Disposing of an asset includes:

If you sell a property that your have lived in you will probably qualify for Principle Private Residence Relief

https://stevejbicknell.com/2015/04/13/how-does-principle-private-residence-relief-work/

Even it it wasn’t your Principle Private Residence but you did own it personally you will still get an allowance of £11,100 tax free.

Companies get an indexation allowance

https://stevejbicknell.com/2012/06/17/capital-gains-tax-for-companies/

Residential properties don’t qualify for business asset rollover relief.

Once you have worked out your gain, the choices for individuals are:

Report your gain and pay straight away

You can use the Report Capital Gains Tax online service for the 2016 to 2017 tax year (6 April 2016 to 5 April 2017) if you’re a UK resident.

You’ll need a Government Gateway account – you can set one up from the sign-in page.

You don’t need to wait for the end of the tax year – you can use this service as soon as you’ve calculated your gains and the tax you owe.

Report in a Self Assessment tax return

Use Self Assessment to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment by 5 October following the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

Report Company Capital Gains in a Corporation Tax Return

Report your gains to HM Revenue and Customs (HMRC) when you file your Company Tax Return. How much tax you pay depends on any allowances and reliefs you claim.

steve@bicknells.net

Soon you could pay income tax on selling a Buy to Let! Reply

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If you thought paying Capital Gains at higher rates was bad enough wait till you have to pay income tax rates on the gains!

As reported by Property 118 on 25th August 2016

The government have slipped some additional clauses into the finance bill 2016 “Sections 75-78: taxation of profits from trading and investing in UK Land” which make profits made on the sale of buy-to-let property become taxable income, at income tax rates.

They have started a campaign to try to stop the change https://www.property118.com/capital-gains-on-btl-to-be-taxed-as-income/89928/

Its another rule that won’t apply to companies.

https://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

Factsheet

Click Here to Download the Factsheet

 

steve@bicknells.net

How do you nominate a residence as your main residence? 2

Dream house in spotlight

Your main home benefits from Principle Private Residence Relief which means you don’t pay Capital Gains Tax, but what if you have a second home?

If you don’t make an election HMRC will decide which is your main residence, that might not be the best option from a tax perspective.

So how do you make an election?

Firstly you must make the election within 2 years from the date of acquiring the second home.

Then you need to write to HMRC giving the date you acquired the second property and stating your election under the provision of s222(5) Taxation of Chargeable Gains Act 1992.

Once you have an election in place you can change it whenever you wish.

steve@bicknells.net

 

How does Principle Private Residence Relief work? 1

One family house for sale

Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence, but how does it work, lets take a basic example

Property Purchase Date 30/04/2001
Property Purchase Price £100,000
Date Moved Out 30/10/2010
Letting Start Date 01/11/2012
Date Sold 31/10/2014
Sale Price £200,000

Capital Gains tax calculation

Sale proceeds 31/10/2014 £200,000
Cost (assuming no improvements) -£100,000

Gross capital gain £100,000

Reliefs available
Principle Private Residence Relief

Actual Occupation 9.5 Years
Started 30/04/2001
Ended 30/10/2010

Plus last 18 Months of Ownership 1.5 Years
The Property was empty prior to letting
Up to 18 months could be by ‘absence for any reason’

Total period where private residence relief is
available 11.0 Years

Total Period of ownership 13.5 Years

Principle private residence relief
£100,000 x (132 mths/162 mths) £81,481

Gain after principle private residence relief £18,519

Letting Relief
01/11/2012 to 31/10/2014 2.0 Years

Lettings relief is to lower of
£40,000 statutory maximum
£81,481 the principle private residence relief in this example
The gain for the letting period

Gain attributable to letting 2/13.5 x £100,000 £14,815
This is the lowest figure

Capital gain after reliefs £3,704

Annual Exemption for 2014/15 £11,000

So in this example there is no tax to pay

For further details see the HMRC Helpsheet 283

For gains on sales prior to 6 April 2014, PPR is available for the last three years of ownership of a property that has been a main residence at any time.  This is the case regardless of whether or not it has been occupied during the last three years of ownership.

But as a result of the 2014 Budget, from 6 April 2014 the automatic exemption from tax on gains in relation to the final years of ownership is now restricted to cover the last 18 months rather than three years.

steve@bicknells.net

 

No Rollover for Buy to Lets 1

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Its a common mis-understanding that many Buy to Let investors think that they can rollover the gains under business asset rollover reliefs.

Residential Property Investment is not a trading activity, whenever you sell a property that isn’t your main residence you will be liable to capital gains tax.

If you want to release cash from your property portfolio its better to consider other options such as re-financing to take advantage of capital growth.

Also joint ownership (particularly between spouses) will increase the available Capital Gains Allowance you have, individuals currently have £11,000 per year. This allowance might cover your gain?

steve@bicknells.net

Is Commonhold better than Leasehold for Flats? 1

Mosaïque de logements

Most residential flats are owned on Long Leasholds but this creates tax issues –  Stamp Duty, Capital Gains, Income Tax/Corporation Tax.

Take a look at HMRC Helpsheet 292 and CG70700 to get an idea of Capital Gains Tax issues!

Fortunately ESC/D39 can be applied to Lease Extentions

In practice, the surrender of an existing lease and the grant of a new lease should not be treated as a disposal for Capital Gains Tax purposes if the taxpayer so wishes and all of the following conditions are satisfied:

  • the transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length;
  • the transaction is not part of or connected with a larger scheme or series of transactions;
  • a capital sum is not received by the tenant;
  • the extent of the property under the new lease is the same as that under the old lease;
  • the terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.

CG71240

The terms of a particular lease may provide for its extension if the tenant so requests. If such a request is made, the extension of the lease does not have any immediate Capital Gains Tax consequences.

In 2002, Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002 (CLRA 2002). Commonhold can be applied to both Commercial and Residential buildings.

The advantage of commonhold is that it gets rid of the concept of the declining asset – sellers and purchasers of commonhold properties will no longer have to worry about how many years are left on the lease.

Under the commonhold system, all flat owners will automatically be members of a company – the Commonhold Association – that owns the freehold and thus the block.

This means that it should be easier to run the building for the benefit of the flat owners.

However, blocks of flats will still need to be managed.

And as a form of community ownership, commonhold brings with it various tensions.

To alleviate any possible problems, members will have to sign up to a “Commonhold Community Statement”.

This statement will set out all the rules and regulations you normally find in a lease, for example rules about subletting, pets, noise and use of gardens.

Which is better?

steve@bicknells.net

 

How do you give away property in stages? 2

Mosaïque de logements

As long as the home you give away is your main home, Capital Gains Tax won’t be payable.

However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.

If you sell your second home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for 7 years after you make the gift.

Each year individuals have a capital gains tax allowance, called an exemption

 

Annual Exempt Amounts
Customer group 2012-13 2013-14 2014-15
Individuals, personal representatives and trustees for disabled people £10,600 £10,900 £11,000

 

It is possible to to gift property in stages.

Your solicitor will draw up the required documents to conveyance a percentage of the property and register the transactions with the Land Registry.

In order to calculate the capital gain you will need to know the acquisition cost and any reliefs such as PPR.

Giving away your property in stages could save you from having to pay capital gains tax.

The person you give the property to may not have to pay SDLT

If the property is received as a gift there’s no SDLT to pay, so long as there’s no outstanding mortgage on it.

steve@bicknells.net

Capital Gains Tax for Companies 1

Capital Gains can occur in many circumstances, for example, when the company:

  • sells, gives away, exchanges or otherwise disposes of (cease to own) an asset or part of an asset
  • receives money from an asset – for example compensation for a damaged asset

Sometimes it can be hard to establish the value of the gain and HMRC can carry out a post valuation check which is requested using http://www.hmrc.gov.uk/forms/cg34.pdf

Example – calculating the chargeable gain on the sale of a shop
Calculation step Result
Step 1: amount received for the asset in May 2011 £200,000
Step 2: deduct £120,000 (the cost of the asset in November 1997) £200,000 − £120,000 = £80,000
Step 3: deduct expenses on improving the asset (£10,000 spent on building an extension in June 2006) £80,000 − £10,000 = £70,000
Find the inflation factor for November 1997 0.474
Calculate the Indexation Allowance £120,000 × 0.474 = £56,880
Deduct the Indexation Allowance £70,000 − £56,880 = £13,120
Step 4: look up the appropriate inflation factor and calculate the Indexation Allowance for the extension 0.185
£10,000 × 0.185 = £1,850
Deduct the Indexation Allowance for the extension to arrive at the chargeable gain £13,120 − £1,850 = £11,270

http://www.hmrc.gov.uk/ct/managing/company-tax-return/returns/chargeable-gain.htm

You can get a full list of indexation allowances at http://www.hmrc.gov.uk/rates/cg-indexation-allowance/apr12-ct-cgains.pdf

If the losses don’t exceed the gains, put the total gains in Box 16 on your Company Tax Return and the total losses, if any, in Box 17. Deduct Box 17 from Box 16 and put the result in Box 18 – this is your ‘net chargeable gain’.

If the losses do exceed the gains, leave Box 16, Box 17 and Box 18 blank but put the amount of the net loss in Box 131. You can then ‘carry forward’ those capital losses to offset against any capital gains you make in a future Corporation Tax accounting period(s). You would include those losses in Box 17 of a future Company Tax Return. You can carry forward capital losses indefinitely.

If you intend to replace the asset you may be able to apply Business Asset Rollover Relief, this is most commonly use for Land and Buildings.

steve@bicknells.net