November 1 2014 Latest news:
Tuesday, February 26, 2013
NEXT month, HM Revenue & Customs plans to launch a “disclosure campaign” for individuals who have sold a property in the UK or overseas and not disclosed the resulting tax liability on their tax returns. But why is this necessary if homes are exempt from Capital Gains Tax (CGT)?
The answer is that, in reality, the law is much more complicated than that and the sale of an individual’s main residence is not always tax-free.
If you have ever occupied a property as your main residence, a proportion of any gain made on selling it will be exempt from CGT – the longer you live there, the bigger the exempt proportion.
In addition, further reliefs can apply to the period that the same property is let and even for periods when you did not live in it, for example, the final 36 months of ownership. If you own and use two properties, you can nominate (in writing) which is your main residence and can switch at any time - labelled “flipping” when it emerged that many MPs did this to avoid tax on selling second homes.
However, the sale of a pure holiday home or investment property is liable to CGT like any other investment asset unless the property qualifies as a furnished holiday letting and the proceeds of sale are reinvested in another qualifying business asset. Sadly, for Inheritance Tax purposes, a furnished holiday letting is not likely to be regarded as an exempt business asset unless it is run more like a hotel, with the supply of lots of additional facilities and services that would not normally be offered at a cottage by the sea.
Making regular purchases and sales of property can also be treated as trading with the profit liable to income tax. HMRC knows that many individuals who try the flipping game are simply property developers and have never really lived in the property: it is increasingly challenging those who flip frequently.
Precise details of the campaign have not been released at the time of writing but it is expected to start with a disclosure period, during which individuals can voluntarily declare and pay any outstanding tax on past sales along with a tax penalty. Then there will be follow-up investigations into those who do not come clean using Land Registry records from both the UK and overseas authorities to track property disposals and identify potential tax evaders.
Anyone who has sold a property that they did not live in exclusively from the date of purchase to the date of sale, should seek advice on the correct tax treatment and what, if anything, now needs to be disclosed to HMRC.
: : Peter Harrup is a partner and tax specialist at the Ipswich office of accountants and business advisers PKF.