Tag: CGT

How and when do you report capital gains tax on residential property disposals?

real estate agent holding a signage

As a property owner in the UK, it is important to understand the capital gains tax (CGT) rules and regulations. CGT is a tax on the profit made when you sell or dispose of an asset, such as a property. In this blog, we will cover the 60-day reporting rule, how to calculate capital gains, how to report capital gains, how to get a reference, and how to appoint an agent.

The 60-day reporting rule

From 27 October 2021 (before that it was 30 days from 6 April 2020) the reporting deadline was re-set at 60 days and requires UK residents to report and pay CGT on the sale of a residential property within 60 days of completion. Failure to report within this timeframe can result in penalties and interest charges. Non-UK residents are also required to report and pay CGT within 60 days of completion, unlike UK residents they need to report under the CGT rules even if they made a loss or had no tax to pay.

Companies are not required to report under the 60 day rules.

The rules apply to:

  • Individuals
  • Trusts
  • Personal Representatives
  • Partnerships
  • LLPs
  • Joint Property Owners
  • Non UK Residents

Calculating capital gains

To calculate your capital gains, you need to subtract the cost of the property from the sale price. The cost of the property includes the purchase price, any fees or expenses incurred during the purchase, and any improvements made to the property. You can also deduct certain expenses, such as estate agent fees and legal fees, from the sale price. Once you have calculated your capital gains, you need to work out how much tax you owe. The amount of tax you pay depends on your income and the amount of capital gains you have made. The current CGT rates for residential property are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

There is an annual exempt amount for individuals

  • 2022/23 £12,300
  • 2023/24 £6,000
  • 2024/25 £3,000

For Trusts the amounts above are halved

If the UK Resident lived in the property they could qualify for Private Residence Relief HS283 Private Residence Relief (2023) – GOV.UK (www.gov.uk)

If there is no gain then UK Residents don’t need to report under the 60 day rules. Non UK Residents need to report even if its a loss.

Reporting capital gains

UK Residents need to use Report and pay your Capital Gains Tax: If you sold a property in the UK on or after 6 April 2020 – GOV.UK (www.gov.uk)

Even if they want an Agent to report for them they at least need to start the process and get an X reference to pass to their Agent/Accountant. The Agent can use the X reference in the Agent Gateway to generate a link for the client to accept to appoint them as Agent.

You only need one X reference/Property Account even if you have multiple property disposals.

The gain also need to be reported on the their Self Assessment Return showing the tax already paid.

Non UK Residents need to use HMRC: Structured Email (tax.service.gov.uk)

Problem Areas

Personal Representatives – Trusts can’t create accounts – the executors register and tick to report for someone else

Estimates – if the estimates are unreasonably low, HMRC will put in their own figures and charge interest

Overpayments – need to go back and change the figures

steve@bicknells.net

Residential Property Capital Gains Overpayment Madness

By now I am sure you are familiar with the rules

From 27 October 2021, you must report and pay within 60 days of completion of conveyance.

For example, if you complete the disposal on 1 November you must report and pay your Capital Gains Tax by 31 December.

If the completion date was between 6 April 2020 and 26 October 2021 you must report and pay within 30 days of completion of conveyance.

You may have to pay interest and a penalty if you do not report and pay on time.

Tell HMRC about Capital Gains Tax on UK property or land if you’re not a UK resident – GOV.UK (www.gov.uk)

You report the gains using this link Report and pay your Capital Gains Tax: If you have other capital gains to report – GOV.UK (www.gov.uk)

If you need a tax agent to help you you have to start the process get and X reference, give that to you tax agent/accountant, they then sent the client a link to become their agent.

You also have to report the information again on your self assessment return.

What happens if you over pay the CGT?

You would think that doing the self assessment would generate a refund, but thats not the case, very frustrating!

The only way to recover or offset the overpaid CGT is to follow a new workaround shared by HMRC at the end of June.

The workaround suggests either:

(a) amending the UK Property Return before submitting the self-assessment return for the year to recover the overpayment that way; or

(b) submitting the self-assessment return and then calling HMRC to ask for a manual transfer to be made of the payments showing on the property account against the self-assessment account so it can then be offset against the total self-assessment bill.

Offsetting overpaid CGT against income tax | ICAEW

CGT Overpayment – Refund request – Community Forum – GOV.UK (hmrc.gov.uk)

CG10450 – Overpayment relief – HMRC internal manual – GOV.UK (www.gov.uk)

steve@bicknells.net

When do you pay Capital Gains Tax on Property Sales?

Currently when you sell a residential investment property you pay CGT via self assessment, so if you sell now, that’s in the tax year to 5th April 2020, due for payment by 31st January 2021, but that’s changing very soon.

From 6 April 2020, when a UK resident disposes of UK land, a CGT return will need to be submitted to HMRC within 30 days of the completion of the disposal, and the full liability will be payable within that same 30 day window.

That’s a big change in time scales!

In order to file potentially complex returns within that time scale, investors will need to

  1. Keep full up to date records
  2. An estimate of the UK Taxpayer full income will be needed to assess the rate of CGT to be applied
  3. Details of the tax payers unused CGT annual exemption
  4. Details of any CGT losses unused

These rules will also apply to Trusts

The rules will apply to UK Properties first and its planned to include overseas property a year later.

steve@bicknells.net

 

How do calculate property capital gains tax?

Assuming you own the property personally and its not your main residence (and benefiting from Principle Private Residence Relief), there are 2 rates of capital gains tax 18% for lower rate tax payers and 28% for higher rate tax payers.

You also have a CGT allowance which for 2018-19 is £11,700.

As a rough guide to assessing the tax

  1. Work out how much you have earned – Salary, Pension, Dividends etc
  2. Calculate your taxable gain  + Sale Price – Sale Costs – Purchase Price – Purchase Costs – Improvements
  3. You can then deduct the CGT allowance of £11,700 from the Gain (assuming you haven’t used against other gains)
  4. If the total of 1 to 3 comes to more than £46,350 you pay 28% tax on the capital gain, if the total is less than £46,350 you will pay 18% on the gain until you hit £46,350 then pay 28% once you exceed it

You can now pay CGT straight away using the HMRC online service but most people do via self assessment and pay by 31st January following the end of the tax year.

 

steve@bicknells.net

 

Can I move income from my investment to my spouse?

We have covered this topic before in Are property transfers between spouses taxed?

That blog discussed Capital Gains and SDLT.

We also explained the process in this blog How do you share property ownership income between spouses?

That blog covered Form 17 and Declaration of Beneficial Interest

Today there was a great blog from Croner Taxwise that I wanted to share it

Can I assign the income from my investment property to my spouse so it is taxed at a lower rate?

A. Due to the abundance of legislation that applies to land transactions and gifts, various tax implications are of concern.
Where only an income stream is transferred and the transferor retains an interest in the capital value of the property generating the income, the income is treated for income tax purposes of the income of the transferor under the settlement legislation at ITTOIA 2005 s.624.
To effect a transfer of the income stream and achieve the client’s objective, the transferor must also transfer a proportionate capital interest. To transfer 50% of the income stream effectively, a 50% interest in the capital value of the property also must be transferred.
Capital assets are transferred between spouses at nil gain or loss for capital gains tax purposes. The deemed consideration is so much as would secure a net gain of £0 after accounting for enhancement expenditure, costs to transfer, etc. There are exceptions to this rule where the spouses are not living together so do not assume tax neutrality will apply.
Take additional care where the property in question was previously the main residence of the transferring spouse, as private residence relief may be inadvertently lost. A transferee spouse will only acquire the ownership and occupation history of the transferor where the property is transferred whilst it is the main residence of both spouses (TCGA 1992, s.222(7)). If the property is not their main residence, a gain which would have been 100% relieved in the hands of the transferring spouse will come into charge on a future disposal by the acquiring spouse.
The final tax charge to consider is Stamp Duty Land Tax. There is no exemption from SDLT for transfers between spouses. SDLT is chargeable where the acquiring spouse provides consideration for their interest in the property, including assuming liability for debt.
Although not technically a tax issue, it is of note that a transfer of beneficial ownership of a property does not require a conveyance of legal title. Although a trust arrangement does not need to be written to be effective, a written declaration which is signed and dated can prevent disputes with HMRC over the validity and commencement of the transfer, particularly where income continues to be deposited into a joint bank account.

 

steve@bicknells.net

 

Can a Property Flipper or Developer use Entrepreneurs Relief?

City Developer

Property Flipping and Development are Trades (not investments), so YES, they could qualify for Entrepreneurs Relief.

You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.

Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets.

Work out if you qualify

You’ll qualify if you dispose of any of the following:

  • all or part of your business as a sole trader or business partner – including the business’s assets after it closed
  • shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’)

https://www.gov.uk/entrepreneurs-relief/eligibility

5 Pitfalls to avoid with Entrepreneurs Tax Relief

How does Entrepreneurs Relief help?

Let’s take an example using a Company

Flipping or Development Profit £100,000

Corporation 20% £20,000

Profit after Tax £80,000

If close the business and you apply Entrepreneurs Relief the you will pay 10% tax = £8,000

You will also get your CGT allowance of £11k deducted first.

Without Entrepreneurs Relief the tax would 20% or even more if the distribution was via dividends or salary. For unincorporated businesses the tax could be 20%, 40% or 45%!

What are the rules for ending a business?

  • The business has ceased.
  • The assets were in use at the time of cessation.
  • The business was owned for 1 year by the individual prior to cessation.
  • The assets were disposed of within 3 years of cessation.
  • The assets are not held as investments.

However, if you do the same thing within 2 years HMRC may consider that you are only doing this to gain a tax advantage and it could then be treated as income.

steve@bicknells.net

 

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

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

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

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

Are property transfers between spouses taxed?

Mosaïque de logements

When you think about property and property investments the first tax that comes to mind is Capital Gains Tax (CGT).

You don’t pay Capital Gains Tax on assets you give or sell to your husband, wife or civil partner, unless:

The tax year is from 6 April to 5 April the following year.

https://www.gov.uk/capital-gains-tax/gifts

However, if your property has a mortgage transfering it could create a Stamp Duty Charge (SDLT).

You might pay SDLT when you transfer a share in a property to a husband, wife or partner when you do one of the following:

  • marry
  • enter into a civil partnership
  • move in together

You pay SDLT if the consideration given in exchange for the share transfer is more than the current SDLT threshold for the property type.

Example 1 – you don’t pay SDLT

A house has a value of £180,000. The owner of the property has equity of £90,000 and an outstanding mortgage of £90,000. The owner transfers a half share of the property to their partner.

Their partner:

  • pays cash for half of the equity – £45,000
  • takes responsibility for 50% of the outstanding mortgage – £45,000

So the consideration for SDLT is £90,000, made up of the:

  • cash payment
  • 50% share of the outstanding mortgage

£90,000 is below the current SDLT threshold so there’s no tax to pay. You must still tell HM Revenue and Customs (HMRC) about the transaction on an SDLT return.

Example 2 – you pay SDLT even though no money changes hands

The owner of a property valued at £500,000 with an outstanding mortgage of £400,000 transfers half the property to their partner when they marry. Their partner takes on 50% of the mortgage (£200,000).

HMRC charge SDLT on the amount paid for a property or the amount of ‘consideration’ given.

By taking liability for the mortgage, the owner’s partner has given ‘consideration’ of £200,000 for their share of the property which is £1,500 SDLT (0% of £125,000 + 2% of £75,000).

They must pay SDLT on that amount and tell HMRC about the transfer by filling in an SDLT return.

The equity isn’t included in the calculation as you only pay SDLT on the consideration given.

If the transfer is a gift

If the transfer is a gift and there’s no consideration, SDLT doesn’t normally apply.

https://www.gov.uk/guidance/sdlt-transferring-ownership-of-land-or-property

steve@bicknells.net

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

act now icon

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.

5 reasons why you need a Property Investment Company!

Factsheet

Click Here to Download the Factsheet

 

steve@bicknells.net

Will TAAR cause you problems on company distributions? (New Share Rules)

Successful Businessman With A Contract In Hand

HMRC are currently consulting on new rules to start in April 2016.

The consultation is focusing on Capital Gains Tax (CGT) ways to extract money from companies to create Target Anti Avoidance Rules (TAAR) covering:

  1. A disposal of shares to a third party
  2. A distribution made in a winding up
  3. A repayment of Share Capital including Share Premium
  4. A valid purchase of own shares in an unquoted company

Here are the examples of ‘problems’ HMRC want to resolve, Example 1 is ‘moneyboxing’ and/or ‘phoenixism’ and sometimes involves ‘special purpose vehicles’

Example 1

Example 2 involves creating a holding company…

Example 2

The consultation ends on the 3rd February 2016, the results are likely to be controversial!

steve@bicknells.net

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