Nominating a principal private residence

There is usually no Capital Gains Tax (CGT) due on a property which has been used solely as the main family residence. Conversely, an investment property which has never been used as a private residence will not qualify for relief. This relief from CGT is commonly known as private residence relief.

There are a number of issues taxpayers that own more than one home should be aware. An individual, married couple or civil partnership can only benefit from CGT on one property at a time. However, it is possible to choose which property benefits from a CGT exemption by making an election.

This must be done by nominating one property as your main home by writing to HMRC and specifying (with the full address) which home you want to nominate. All owners of the property must sign the letter. If you want to nominate a home you must do this within 2 years of any relevant change. You must have also lived in the house as your main or only residence at some point in the past.

There are special rules for overseas property and for non-UK residents. It is important to carefully consider the timing and frequency of changing an election.

If a property has been occupied at any time as an individual’s private residence, the last 9 months of ownership are disregarded for CGT purposes – even if the individual was not living in the property when it was sold.

Tax and divorce

When a couple is in the process of becoming separated or divorced it is unlikely that they are thinking about the tax implications of doing so. However, it is important that the tax consequences of the break-up are properly considered.

Whilst Income tax does not automatically cause an issue for separating couples, as it is an individually assessed tax, there are other taxes that need to be considered. For example, when a couple are together there is no Capital Gains Tax (CGT) payable on assets gifted or sold to your spouse or civil partner. However, if a couple separate and do not live together for an entire tax year or get divorced then CGT may be payable on assets transferred between ex-partners.

This effectively means that the optimum time for a couple to separate would technically be at the start of the tax year so that they would have up to a year to plan how to split their assets most tax efficiently. Obviously, in the real world most couples will have far more on their minds than deciding to get separated on a certain day, but these issues should be kept in mind.

It is also important to look at making a financial agreement that is agreeable to both parties. If no agreement can be reached, then going to court to make a 'financial order' will usually be required. The couple and their advisers should also give proper thought to what will happen to the family home, any family businesses as well as the Inheritance Tax implications of separation and / or divorce.

Reporting gains on residential property

The Capital Gains Tax (CGT) reporting and payment date for UK residents that sell certain residential property changed from 6 April 2020. This change meant that any CGT due on the sale of a residential property needs to be reported and a payment on account of any CGT due made within 30 days of the completion of the transaction.

In practice, this change will only apply to the sale of a residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to qualifying residential properly used wholly as a main family residence.

HMRC had announced that as a result of the Coronavirus pandemic they would adopt a light touch approach and there would be no late filing penalty for any transactions completed on or after 6 April 2020 to 1 July 2020 and reported up to 31 July 2020. However, interest continued to be charged if the tax remained unpaid after 30 days for all transactions from 6 April 2020.

This grace-period has now ended and landlords and second-home owners amongst others will receive a late filing penalty if capital gains are not reported within 30 calendar days of completion of the transaction. Taxpayers that fail to meet the deadline, will be subject to a £100 fine, rising to £300 or 5% of any tax due (whichever is greater) the longer the payment is outstanding.

Note, the payment date for any CGT due on residential property sales made before 6 April 2020 will be 31 January 2021.

Review of CGT on the cards?

The Chancellor, Rishi Sunak has written to the OTS (Office of Tax Simplification), asking the OTS to undertake a review of Capital Gains Tax (CGT) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses. In response to the request, the OTS has published a scoping document for the review, together with a call for evidence and an online survey.

The scope of review will include looking at the following areas: the overall scope of the tax and the various rates which can apply; the reliefs, exemptions and allowances which can apply, and the treatment of losses; the annual exempt amount and its interactions with other reliefs; the position of individuals, partnerships and estates in administration, and of unincorporated businesses and stand-alone owner-managed trading or investment companies; and interactions with other parts of the tax system such as Income Tax, Capital Allowances, Stamp Taxes and Inheritance Tax, including potentially different definitions for similar transactions/events.

The review will also consider a number of more specific issues, including clearance and claims procedures; chargeable gains on shares and securities; the acquisition and disposal of property; the practical operation of principal private residence relief; consideration of the issues arising from the boundary between Income Tax and Capital Gains Tax in relation to employees; valuations, record-keeping, calculating any tax payable and making returns, including claiming losses and the information HMRC have and can use to help them reduce administrative burdens, improve customer experience and ensure compliance.

The OTS are inviting response on the principles of CGT by 10 August 2020, and on the main section of the call for evidence by 12 October 2020. 

Reporting Capital Gains on residential property

The Capital Gains Tax (CGT) reporting and payment date for UK residents that sell a residential property changed from 6 April 2020. This change means that any CGT due on the sale of a residential property needs to be reported and a payment on account of any CGT due made within 30 days of the completion of the transaction.

In practice, this change will only apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to qualifying residential property used wholly as a main family residence.

HMRC has listed the following types of property sales that are affected:

  • a property that you have not used as your main home;
  • a holiday home;
  • a property which you let out for people to live in;
  • a property that you have inherited and have not used as your main home.

This new reporting requirement does not apply to sales of your home if the private residence relief was available for the period of your occupation. There can be penalties and interest if any CGT due is paid late. Note, the payment date for any CGT due on residential property sales made in the year before 6 April 2020 will be 31 January 2021.

There were also changes to the PRR rules which saw the final exempt period for CGT purposes being reduced from 18 months to 9 months – from 6 April 2020. This relief applies even if the homeowner was not living in the property when it was sold. The time period can be extended to 36 months under certain limited circumstances.

Spring Budget 2020 – Entrepreneurs’ Relief

The Chancellor confirmed that a review into the effectiveness of Entrepreneurs' Relief has now been completed. Where this relief is available Capital Gains Tax of 10% is payable in place of the standard rate. The Chancellor had many representations saying that the relief is ineffective and expensive and should be abolished. In fact, the Chancellor confirmed that three quarters of the relief goes to just 5,000 people with the relief currently costing government £2.6bn a year.

However, Chancellor Sunak, decided not to abolish the relief but rather to reduce the lifetime limit. Therefore, with immediate effect from Budget date, 11 March 2020, the lifetime limit is being reduced from £10 million to £1 million. There will be special provisions for disposals entered into before 11 March 2020 that have not been completed.

On balance, most entrepreneurs will probably be satisfied with this change as there was a lot of pressure on the Chancellor to fully remove this relief. The change in the limit will not impact over 80% of claimants and will, according to HMRC, encourage genuine risk takers and entrepreneurs’ in a fair way. This should help encourage the view that the government remains supportive of the development of new businesses.

There are a number of qualifying conditions that must be met in order to qualify for the relief. The new £1m lifetime limit means that individuals can qualify for the relief more than once subject to an overriding total limit of £1m of qualifying capital gains.

Spring Budget 2020 – Capital Gains Tax

The annual exemption for individuals is currently £12,000. From 6 April 2020, this will increase to £12,300. A husband and wife each have a separate exemption. Same-sex couples who acquire a legal status as civil partners are treated in the same way as married couples for CGT purposes.

The annual exempt amount is increased annually to keep pace with inflation in-line with rises in the Consumer Prices Index. Most trusts have an annual exemption of £6,000 (increasing to £6,150 in 2020-21). Where the remittance basis is claimed by a non-UK domiciled individual, the taxpayer is not entitled to the annual exemption. There are special rules for gains that qualify for Entrepreneur’s relief and / or Investor’s relief.

CGT is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. If taxpayers only pay basic rate tax and make a small capital gain they may only be subject to a reduced rate of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT applies (18% and 28%) to gains on the disposal of residential property (apart from a principal private residence).

The usual due date for paying any CGT owed to HMRC is the 31 January following the end of the tax year in which the capital gain was made. From 6 April 2020, this will change for any CGT due on the sale of a residential property by a UK resident. The sale will need to be reported and any CGT due paid within 30 days of the completion of the sale transaction.

Residential property sales from April 2020

We have included updates in our newsfeed earlier this year that sales of residential property subject to Capital Gains Tax (CGT) – from 6 April 2020 – will need to be reported and paid to HMRC within 30 days of completing the sale.

Here’s the type of property sales that HMRC say will be affected:

  • a property that you have not used as your main home;
  • a holiday home;
  • a property which you let out for people to live in;
  • a property that you’ve inherited and have not used as your main home.

So that we can help you meet this new deadline be sure to notify us in advance of the sale so we can gather together the information required to meet the new deadline. Penalties and interest may be applied if any CGT due is paid late.

This new reporting requirement does not apply to sales of your home as long as the private residence relief was available for the entire period of your occupation.

Meaning of goodwill for CGT purposes

Goodwill is a subject we hear about often but interestingly is rarely mentioned in legislation. In fact, the term 'goodwill' is not defined for the purposes of the Capital Gains legislation in TCGA 1992.

Most definitions of goodwill are derived from case law. At its simplest you could describe goodwill as the 'extra' value of a business over and above its tangible assets.

In the vast majority of cases, when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of placing a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'

Still time to utilise annual tax-free allowance

We would like to remind our readers that there is still time to use the annual exemption for Capital Gains Tax (CGT). In the current 2019-20 tax year, this amounts to £12,000. This means that there is no CGT to pay on the first £12,000 of gains where you dispose of chargeable assets, such as property or stocks and shares.

If you are a married couple or civil partnership, you should ensure that each of party utilises their full annual exempt amount wherever possible. Any unused part of the annual exempt amount cannot be carried forward and is forfeited if unused in the current tax year.

CGT is usually charged at a simple flat rate of 20%. If you only pay basic rate tax and make a small capital gain, they may be subject to a reduced rate of CGT of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT (8% supplement) applies to gains on the disposal of chargeable residential property.

Planning notes

  1. If you have sold or are planning to sell any assets in the current tax year, it is important to ensure that you take full advantage of the annual CGT exemption and arrange your affairs accordingly. For example, capital losses are deducted from gains before net gains are calculated. Crystallising a loss that will waste the annual exemption should therefore be avoided.
  2. Any CGT due on chargeable gains that relate to the disposal of residential property on or after 6 April 2020 will be due within 30 days of completion. If you are considering selling a property soon, it would be beneficial to do so before the end of the current tax year. In this way you will benefit from an extended time period to pay any CGT due. This is because the payment date for any CGT due on residential property sales made before 6 April 2020 will be 31 January 2021.
  3. If you sell a residential property that has always been your family home – no periods of sub-letting – the new 30 day reporting and payment window will not apply as the gain will be covered by the Private Residence Relief.