CAPITAL GAINS TAX
Capital Gains are made on the disposal of an asset (such as an investment property) at a value or selling price greater than that when you acquired it. Capital losses arise where the disposal is at a value less than that on acquisition. For most arms-length transactions, the values are taken as the price paid. Other types of disposal (eg.: gifts) are treated the same way by using the open market valuation in place of money paid. Tax is chargeable on capital gains to the extent that they are not covered by exemptions, reliefs or allowances.
PERSONS LIABLE TO CAPITAL GAINS TAX
- Non-residents are liable to Capital Gains Tax (CGT) on the gain arising after 5th April 2015 on the disposal of UK residential property.
- Non-residents are liable to CGT on the gain arising after 5th April 2019 on the disposal of UK non-residential property.
Temporary non-residents are those who are not non-resident for five full UK tax years or more. They are liable to CGT under the same rules as UK residents for any disposals of UK property. While they are overseas they will be taxed as non-residents and then on their return, the CGT will be re-calculated as if they had been UK resident at the time of disposal.
It is possible for a non-resident landlord who is in the UK for more than 90 days in any one UK tax year to elect a UK property to be his Principal Residence and obtain substantial tax reliefs from Capital Gains Tax. However, this is a very high risk strategy as it may make him UK resident for all tax purposes with financially disastrous consequences.
All disposals of UK residential property and non-residential property by non-residents must be reported to HMRC within 30 days of completion. Any tax due must be paid within the same 30 days.
CALCULATING CAPITAL GAINS AND LOSSES ON THE DISPOSAL OF INVESTMENT PROPERTY
The detailed calculation of the taxable Capital Gain arising on the disposal of an investment property is complex and should normally be undertaken by a suitably qualified person. Special rules apply where a transaction is not at an arms-length value.
- The cost is taken as the headline price or value plus all legal costs, stamp duty survey fees etc.
- The sale proceeds are the headline price or value less the agents fees, legal fees etc.
- Some improvement costs may be added to the cost of the asset
- The gain is deemed to have accrued evenly over the period of ownership.
- Where a residential property was acquired before 5th April 2015 (2019 for non-residential property) it is necessary to arrive at a valuation at that date. To arrive at the notional value at 5th April 2015/2019 non-residents have two choices. Either the gain over the entire period of ownership is time apportioned, OR the actual value at 5th April 2015/2019 is used.
- Exceptionally where the property was acquired before 5th April 2015 (2019 for non-residential property) the value as at 5th April 2015 may be ignored and the CGT calculated as for UK residents - i.e.: calculating the gain or loss over the whole period of ownership.
- Any gain accruing when it was your own Principle Private Residence is exempt (Private Residence Relief).
- Where a gain is made on a property that has at any time been your Principal Private Residence, the gain accruing in a final period of up to 9 months is ignored (18 months for a disposal before 6th April 2020).
- If the property has been your principle private residence and it has been let as residential accommodation there is a further allowance not exceeding the sum of the previous two items and is capped at £40,000. From 5th April 2020 the new conditions for relief mean that it is very unlikely that non-residents will be able use this relief (Letting Relief).
- Other reliefs may be available.
- The cost is deducted from the sale proceeds then the exempt amounts are deducted.
- Then the personal annual exempt amount is deducted.
- Capital Gains of individuals arising on the disposal of residential property (after deducting the Annual Allowance) are notionally added to the taxpayers other taxable income. To the extent that they would otherwise fall within the basic rate band they are taxable at 18% and the excess is taxable at 28%. The tax rate for gains made on non-residential property is 10%/20%.
TREATMENT OF LOSSES ARISING ON THE DISPOSAL OF INVESTMENT PROPERTY
- Losses may be set off against gains of the same year.
- Losses may be carried forward and set off against gains of future years. They must be used at the first opportunity and before other reliefs are applied.
- Losses may NOT be carried back against the gains of an earlier year (except from the year of death).
- Special rules restrict the use of losses when they arose in a transaction involving a disposal to a connected person.
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