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Liability to capital gains tax is one of the more costly truths of UK property ownership. For property owners looking for a reduction in their tax bill, effective tax planning will seek to maximise use of the many different types of capital gains tax allowance on property.
When disposing of property in the UK, it will be important to ascertain the capital gains tax position, among other tax liabilities, as determined by the relevant fact pattern. For example:
Professional landlords & property investors: selling a buy to let property, or transferring ownership to a limited company (the latter being pursued more frequently following recent changes in stamp duty and mortgage offsetting) of a property that is not your primary residence will generally trigger capital gains tax.
Non resident owners of UK residential property: under the Non Resident Capital Gains Tax (NRCGT), owners of UK residential property that are not resident in the UK are liable to capital gains on disposal of the asset. This took effect on gains arising after 6th April 2015. Where the property was held before 6th April 2015, the gain must be ‘sliced and diced’ into the part that occurred before this date – deemed not taxable – and the part after the date – deemed taxable.
Furthermore, in Autumn Budget 2017, it was announced that NRCGT will be extended to direct holdings of UK commercial property and also to indirect interests in any UK real estate as and when the shares are sold in ‘property-rich’ companies. It is likely that these new rules will be introduced for disposals from April 2019 onwards.
‘Accidental’ landlords: you inherited a second property that you wish to sell or transfer ownership of. This transaction will generally trigger tax on the gain, calculated on the basis that the property was acquired at market value at the date of the previous owner’s death. Other tax liabilities will also need to be considered.
Executors or personal representatives: where the deceased’s estate comprises property that is disposed of at gain, you will be responsible as an executor or PR for paying the capital gains tax out of the estate.
Second home owners: where you own residential properties that are not your home, such as a house used by your child at university, that you wish to sell, the sale usually leads to capital gains liability. Likewise, gifting the property or a transfer to a structure may also trigger CGT.
Furnished holiday lets (FHL): furnished residential properties in the UK or European Economic Area (“EEA”), let on short-term periods and on commercial terms, are treated as business assets for certain capital gains tax rules, and benefit from numerous capital gains tax reliefs otherwise be unavailable to residential property. Strict rules apply, particularly in respect of the time periods for letting.
In each of these instances, and the many others where CGT on property arises, an effective approach to tax planning should address availability of and eligibility for the various types of capital gains tax allowance on property, in advance of any disposal.
The timing of a disposal in particular can have a significant impact on the availability of reliefs, and early planning can provide the requisite time to create tax efficient structures where relevant.
We take a brief look at some of the more common forms of CGT relief and exemptions available:
Capital gains tax allowance on property: Annual Exemption
The majority of UK taxpayers enjoy a fixed Annual Exemption to capital gains tax. Currently, the annual exemptions are set as follows (November 2017):
Profits on asset disposal above the set annual exemption can be taken without giving rise to CGT liability. Where the gain – less deductible losses and any other reliefs (see below) – stands above this level, the figure exceeding the annual exemption is then taxed per the relevant prevailing rate of CGT – which varies depending on a number factors.
Tax planning becomes valuable in CGT terms given there is no option to carry the annual exemption forward to another tax year. There are however many ways you can look to maximise use of the annual exemption within each relevant tax period.
For example, you might look at disposing an asset standing at a gain where you have a full annual exemption available, or deferring the sale or transfer until the next tax year.
Or, under a spousal transfer, you are permitted to transfer chargeable assets between spouses and civil partners without incurring CGT, by making use of both partner’s respective annual exemptions.
Such planning will require advice as to wider implications on tax liability and availability of other CGT reliefs.
Capital gains tax allowance on property: Primary Residence Relief (PRR)
It’s widely known that an individual’s main home is exempt from CGT – under the so-called ‘Principle Private Residence Relief’ (PPR relief). However – PPR relief may also offer wider CGT benefits when applied to more complex fact patterns.
For example, landlords selling a buy to let property may be able to take advantage of PPR relief if they have lived in the property for a period of time (no prescribed minimum time period). PRR relief allows you to claim relief on the last 18 months of ownership as CGT exempt, provided you can evidence that the property was at some point your primary residence.
Capital gains tax allowance on property: Letting Relief
Letting relief may also be available to buy to let landlords, in addition to PPR relief, where part or all of the property has at some time during your ownership been let as residential accommodation, and a chargeable gain arises by virtue of the letting.
Letting relief allows you to claim the lower of the amount of PPR relief available in respect of the letting; or £40,000; or the amount of the gain arising by reason of the letting.
Capital gains tax allowance on property: Rollover Relief
Where an asset has been purchased within specific timescales to replace a previously used business asset, it may possible to roll over the gain, rendering it payable further down the line when the new asset is sold.
Capital gains tax allowance on property: Seed Enterprise Investment Scheme (SEIS) Reinvestment relief
Reinvestment of gains back into a SEIS company can benefit from capital gains relief, with disposals of SEIS shares exempt from CGT after a three-year qualifying period. There are many conditions to be met directing the use of SEIS; seek advice to ensure you meet these requirements and understand any wider implications on tax liability and relief availability.
Capital gains tax allowance on property: Enterprise Investment Scheme (“EIS”)
Reinvesting gains from disposal into a qualifying EIS company can benefit from EIS relief. This includes the potential to defer the gain on the disposal of an asset, within one year before and three years after. Use of EIS for tax planning is highly complex and further advice should be sought.
Capital gains tax allowance on property: Gift Holdover Relief
Gifting generally has the effect of triggering CGT as a qualifying transfer. Holdover relief is a way to defer this liability. Where a business asset is gifted, or sold undervalue, the original owner and the recipient can jointly elect to defer the gain using Gift Holdover relief. Any chargeable gain arising during the period of previous ownership then becomes payable by the new owner at the point of future disposal.
Likewise, where a non-business asset is transferred into trust, this relief is also available.
Gift Holdover relief can prove attractive where the new owner’s CGT annual exemption has been exceeded and a deferment to a successive tax year is preferred, or indeed where the cash flow benefit of delaying CGT liability is sought.
Capital gains tax allowance on property: Commercial property – non resident exemption
The introduction of the NRCGT scheme applies only to UK residential property. Commercial property owned by non residents remains outside the capital gains regime at present.
However, the position of commercial property is almost certainly going to change. At Autumn Budget 2017, it was announced that NRCGT will be extended to direct holdings of UK commercial property and also to indirect interests in any UK real estate as and when the shares are sold in ‘property-rich’ companies. It seems likely that these changes will be introduced for disposals that take place after April 2019.
It makes financial sense for property owners to consider options to reduce their capital gains liability through legitimate and effective use of the various reliefs and exemptions that are available.
It is imperative that one considers these options well in advance of any property disposal. The options ‘after the event’ are much more limited.
Enterprise Tax advise property owners including investors and landlords on all aspects of tax planning to help meet their commercial goals in a tax-efficient and responsible manner.
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