UK Tax News

Capital gains tax on property sale

 

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With the London property market soaring, exposure to capital gains tax is sharply on the rise. Tax accountant, Ray Coman replies to the questions this raises.

 

When I sell my property will I have to pay tax?

 

 

You will only pay tax on the sale of property that has not been your home.

 

How much could my tax liability be?

 

 

A gain for tax purposes is the increase in value between buying your house and selling it. This taxable gain can be reduced by costs of purchase, of sale and improvement to the property. Any losses you have made previously, and your annual allowance, currently £10,900, could further reduce the taxable gain. Most of the gain would probably be taxed at 28%.

 

How is my tax reduced if the property used to be my home?

 

 

The proportion of gain during which a property was your Principal Private Residence (PPR) will be exempt from tax.

 

You will be treated for tax purposes as living in the property during certain periods of absence, such as when required to temporarily relocate for work. However, you can only have one PPR at any time. For a final period, you are deemed to live a property, even if you actually lived elsewhere, and did not return to live in it. For properties exchanged before 6 April 2014 the final period is 36 months, however it then reduces to 18 months.


If you let a property that was once your home any gain is further reduced by up to £40,000, per owner.

 

Would I save tax owning a property through a company?

 

 

There is rarely any tax benefit to owning a property in a company. Any gains are subject to corporation tax, and when taking gains out of the company, further tax liability is likely to arise on dividends. A company is not eligible for PPR relief or an annual exemption.

 

Should I transfer the property into joint names with my husband or wife before selling it?

 

An acquiring spouse 'inherits' the actual and deemed periods of occupation of the transferring spouse. Transferring a property can, therefore, save a couple tax. However, a person, or a married couple, can only have one PPR at any time. Therefore, if the transferee spouse was previously a homeowner, the transfer could create a significant tax liability.


Transfers between spouses are exempt from capital gains tax.

 

I had two homes, what happens if I sell one of them.

 

 

The fortunate few who have two homes at the same time could benefit by nominating one of the properties as a PPR.

 

How is my tax position affected if the property market does not increase?

 

If price stagnate, the effectiveness of PPR will diminish. If you sell your home for less than you bought it for, the loss cannot be used to reduce any taxable gains you make in the future.

 

Coman & Co can advise on the tax implications of your property investment plans. Please contact us for a free consultation.

 

Final period of deemed occupation to reduce

 

Written by Ray Coman

The final nine months of ownership are a deemed period of occupation provided the property has been lived in by its owner at some stage.  The months are counted back from the date of exchange and are included as periods of occupation for the purpose of caluclating prinicpal private residence relief.  It is not necessary for the owner to occupy the property during the final period for the deeming provision to apply.   

Update: Prior to 6 April 2020 the period of absence was 18 months and the reduction was announced in the 2018 Budget.

 

As from 6 April 2014 the rules change affecting taxpayers who own property that was previously their home.

 

Each person is entitled to dispose of a property occupied as their home without suffering any capital gains tax. However, for any other property an exposure to capital gains tax arises. The tax system will allow a person to continuing to treat their former home as exempt from capital gains tax during certain periods of absence. These periods are referred to as deemed periods of occupation.

 

One deemed period of occupation is the final period of ownership. The final period of ownership would provide exemption from capital gains tax in the situation where a person has moved home but their pervious place is still on the market. The final period used to be 36 months, but for properties exchanged after 6 April 2014 it will reduce to 18 months.

 

Principal Private Residence relief can significantly reduce a person’s tax liability. The reduction in effectiveness of the relief will increase the potential tax burden on eventual disposal of a property. Please contact Coman & Co if you are concerned about the impact of the proposals on your exposure to capital gains tax.

Magazine Articles

 

Ray Coman writes on the topic of taxation for a number of magazines.

 

This section includes a selection of offline articles in publication.

Sole trader or company

 

When you are self-employed a limited company is often worth considering. To help you decide, an accountant responds to some of the usual queries.

 

I am not sure whether the tax savings will make it worthwhile.

 

A company can be suitable for various reasons. Your accountant should help you to understand if and when a company would be right for you.

 

Is having a company going to take up a lot of my time?

 

You would probably spend an extra hour a year being a company rather than a sole trader. This could be a worthy investment of time when compared with the benefits and tax savings of having a company.

 

There would be more penalties

 

Yes, there are penalties for late filing of accounts with Companies House, which would not apply to a sole trader. The deadline for company accounts is typically nine months after the year end, which is about the same as for a personal Tax Return. Most companies are able to meet the deadlines, and so avoid any penalties.

 

The tax would be more complicated

 

If anything company tax is simpler to understand. There is often no national insurance liability and, in many cases, no payments on account. Sole traders typically have to make payments on account to HMRC for estimated, future tax liabilities. As such, the system for sole traders can make liabilities harder to predict and bring about cash flow shortages.

 

If I am registered as a company, does that mean I also have to be registered for VAT?

 

No, the VAT registration threshold (currently £79,000) applies to both sole traders and Companies alike.

 

All my business details would be public

 

Your can register your company at your accountant's address. Therefore, your home address would not be on any public record. For businesses with a turnover less than £6.5 million, the accounts which get filed with Companies House are abbreviated and as such do not include a profit and loss.

 

Don't I lose out on state pensions with a company?

 

There is a risk that you could forfeit state pension by changing the business to a company. However, if the company is arranged properly to pay you a salary each month then your social security should stay protected.

 

It's not as easy to close the business down

 

The procedure for closing down a limited company is now straightforward.

 

Is there now a lot of paperwork when I want to pay myself from the company?

 

Not really, you can simply transfer money from the company bank account to your personal bank account at any time. The money you withdraw will be treated as a mixture of salary and dividend. Most of the reporting of dividends takes place once-a-year after the year end. Usually, the only restriction is to keep about a fifth in the company bank for tax.

 

I would like a further discussion

 

At Coman & Co., we can respond to your query by email and, if suitable, arrange for a free, initial meeting.

HMRC offer incentive to bring Tax Returns up to date

 

Written by Ray Coman

 

HMRC have this month put forward an incentive to taxpayers with overdue Tax returns. A new facility, 'My Tax Return Catch Up', has been made available for filing a tax return for any year up to 2011-12.


By taking advantage of the facility, penalties that would otherwise be due will be significantly reduced. Although late filing penalties, late payment penalties and interest would still apply, HMRC have offered the best terms available for those that file using the 'Catch Up' facility. In particular, HMRC have announced that they would not apply the highest penalty to those taking part in the campaign. This is a late filing penalty of equal to 100% of the tax due for Tax returns which are more than 12 months' late.


In addition to being spared the higher penalty, participants in the initiative would also avoid:

 

  • Determinations. A determination is essentially an estimate of tax liability made by HMRC;
  • Referral to debt collection which could result in unwanted telephone calls and visits; and
  • Possible court action.


With the aide of intelligence gathering software, Connect, HMRC is expected to contact relevant individuals. The proposal is aimed at taxpayers who have received a notice to file a tax return for any tax year up to and including 2011-12. The 'Catch Up' offer will expire on 15 October 2013.
Coman & co can assist:

 

  • Prepare your Tax Returns for outstanding tax years.
  • Take advantage of the offer made by HMRC in the 'My Tax Return Catch Up' campaign.
  • Calculate any tax payable or repayable, late filing late payment penalties and any interest thereon.


Please contact us to discuss how we can assist with the above

Simple situations. Complex situations. If it goes on a Tax Return we deal with it. Contact us for a free, initial meeting.

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