Capital Gains Tax - April 2014

Posted on: April 7th, 2014 Category: Landlord News

Article by Mike Booth, Hanley & Co. Chartered Accountants

Capital Gains Tax is no longer a tax that only affects the very wealthy. If you own a second property, it is likely that you will come under the scrutiny of HMRC when you dispose of it. Any profit on the sale of the property (i.e. the gain), after certain expenses, allowances and exemptions, will be taxed at a rate of 18% or 28% depending on your tax position at the time.

There have been many changes to the Capital Gains Tax (CGT) rules over the last 10 years, but it is the most recent one we should focus on. This change comes into force from April 2014 and impacts on landlords who are disposing of a property which has, at some point, been their principal private residence. In other words, it has been their main home at some point in the past.

Previously, a relief was available which allowed you to avoid paying CGT on the proportion of the gain which arose whilst you lived in the property, plus the proportion of the gain which arose over the last 3 years of ownership. So for example, if you owned a property for 10 years and lived in it as your home for the first 5 years, a total of 8 years would be excluded, even if you rented the property out for the second 5 years. Your CGT liability would be based on 2/10 (i.e. 2 out of ten years), so 1/5 of the gain.

The new rule reduces the extra 3 year relief period to only 18 months. This could increase the amount of CGT you have to pay and in the above example would increase the basis on which tax is calculated from 1/5 to over 1/3 of the gain. A significant difference, particularly if the overall gain is sizeable.

Another important change is the introduction of a CGT charge on future gains made by non-residents when disposing of UK residential property.

The impact of this charge will depend upon the tax regime in their country of residence and the terms of any double tax treaty with the UK. Most double tax treaties provide that capital gains from such property may be taxed in the country in which they are situated.

The full details of this proposal are yet to be published with a consultation period currently underway. Further details will be provided once the position is clearer.

In summary, CGT is a complex tax and anyone who is considering selling a second property should seek tax advice before placing it on the market. By doing so, their tax position can be assessed and action taken to try to reduce any CGT liability.

If you would like to discuss this article, or any taxation matters, please contact Mike Booth of Hanley & Co. on 01539 821869.