Interest has been rising with regards to Capital Gains Tax in the last few years for landlords. There have been persistent rumours about a possible increase in the rate of Capital Gains Tax but nothing as yet coming to fruition.
This blog covers a second report that has been produced by the Office of Tax Simplification which has made some recommendations on possible changes to the tax system and how some of the recommendations could affect landlords.
The areas that will affect most landlords are:
From 6th April 2020, UK Residents have been required to submit a UK Property Return where there is capital gains tax to pay on a sale or gift of a UK residential property. This has previously been the case on residential property disposals for non-residents from 6th April 2015 and non-residential property for non-residents from 6th April 2019. The deadline for both submission and payment is 30 days from the date of completion on the property.
The much wider range of people brought into this regime has highlighted some of the issues. The biggest issue highlighted are those CGT returns that are filed late. This was reported as 33%. That’s 1 in 3 returns filed outside of the 30 day window. There are several reasons that could contribute to this. Our experience is that it is a general lack of awareness of the new rules.
The position for unrepresented taxpayers without a tax adviser is particularly problematic as they may be content to complete tax returns themselves in the same way they have always done without the awareness of the new rules… until some time later when they have completed tax returns and receive a number of penalties saying what should have been done!
Another reason is that certain transactions that create CGT events are not always straight forward. Outright gifts, gifts in to trusts, transfers to a company and transfers on divorce to name a few, can have various implications. A 30 day time limit gives very little room to iron out any complications in the information that needs to be reported.
The recommended solution
The report recommends either extending the deadline to 60 days or requiring estate agents or conveyancers to provide HMRC information on this area. Another separate recommendation is that HMRC should improve their guidance in this area.
Clearly, improving the quality of HMRC guidance in this area should be the first priority before considering how it could be distributed to a wider audience.
We can’t see a reason why the recommendation of a timeframe of 60 days should be an either/or with additional information being provided from conveyancers or estate agents.
Given some of the transactions of outright gifts, gifts in to trusts, transfers to a company, transfers on divorce (and even in some cases an outright sale) do not necessarily involve an estate agent, it seems more sensible that additional guidance should come from the conveyancer to reach a larger audience including those taxpayers who are unrepresented.
A longer period than 30 days from completion would also be advisable to give a little more time to get all relevant information together.
By nature, a divorce is likely to involve a separation of assets. A married couple will likely hold some assets jointly, and this is likely to include rental properties.
If a married couple, that are not permanently separated, transfers rental property to one another, CGT is on a no gain no loss basis (though this is not the case for Stamp Duty Land Tax which is calculated differently.) Once there is permanent separation, the no gain/no loss basis ceases from the tax year following the year of permanent separation.
We increasingly find there is some assumption that you can transfer assets on separation and divorce with no tax implications, or the tax implications not even being considered. This could be an expensive mistake.
The report makes the point that the year of separation is an unrealistic time frame for people to settle a separation of assets in these circumstances. Indeed, a separating married couple, who permanently separate on 4th April would be given one day to split their assets. Clearly, this is unrealistic.
A separated couple are connected persons for Capital Gains Tax. This means, the act of giving an interest (or a 50% interest) in a property to your former spouse would create a Capital Gains Tax event with the amount you are deemed to have received for the interest as being equal to market value.
A couple who are transferring several rental properties to one another without any elections could end up with a sizeable Capital Gains Tax bill, an obligation to report and pay the Capital Gains Tax within 30 days, and not actually receive a penny for the “disposal” of the interest the various rental properties.
The recommended solution
The OTS have recommended extending the no gain/ no loss window for at least two years from the end of the tax year of separation or a reasonable time frame set in accordance with a financial agreement approved by the course.
There is not much to add to this accept we hope this recommendation is adopted. The issues outlined can create a potentially unfair tax event during what is already likely to be a stressful period of someone’s life who is going through divorce. Until this is adopted, couples going through a separation or divorce should be aware that there are potential tax issues here.
The most simple example of private residence relief is where someone lives in a property for the entire period of ownership, and doesn’t usually need to pay Capital Gains Tax on the sale of the property. For landlords that rent out properties that they used to live in, they would normally get a time apportioned amount of the relief that relates to the ownership period, plus the last nine months of ownership. However, issues arise if you try to split the property up.
The legislation permits you to have a garden or land of 0.5 hectares (for those people clever enough to know what a hectare is) qualifying for private residence relief or a larger area required for reasonable enjoyment, having regard to the size and character of the house. The latter is of course arguable and has been the subject to arguments in tax cases.
Although the report found quite favourably for the current state of private residence relief, there was a potential issue identified for individuals who develop a main residence in their garden and move into it. Someone who sells a garden to a developer is treated as making what is called a “part disposal” of their main residence. If you have lived in the property as a main residence for the entire period of ownership, and the garden does not exceed the limits outlines, you would then be able to claim full private residence relief. This means no Capital Gains Tax.
However, if you split the land in to two, there could be a period of time while construction work is being undertaken that would mean this period is not a period of genuine main residence triggering an unexpected capital gains tax charged.
The recommended solution
The OTS has recommended a new provision that would mean private residence relief is able to be claimed where the homeowner subsequently moves in after development.
This is welcome as it prevents an area of “distortion” as the OTS comments on. However, the devil is in the detail. Presumably this relief would cover a genuine period of main residence. There is a bucket load of case law as to what a main residence is.
Care needs to be taken as to the tax position if you were to move into the property to try to avoid Capital Gains Tax and sell the property shortly afterwards. HMRC could view this as not being a genuine period of main residence and subject to a tax charge. Even worse, this may not necessarily be a Capital Gains Tax charge. Developing a property with the intention of selling it for a profit could even be subject to the higher income tax rates which could make the position even worse. Clear guidance as to what this potential extension to private residence relief would and would not cover would be advisable.
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