Property in the UK and Capital Gains Tax
Capital gains tax (CGT) by definition refers to the tax levied on any gains accrued as a sale of any asset. The assets include but not limited to, inheritance, certain gifts, shares, heirloom, sale of business owing to the dissolution of a civil partnership or divorce transfer or even a second property. In this article, we shall focus on the CGT from the perspective of residential property.
CGT – Some preambles:
The CGT levied depends both on the gains from the asset and your income. However, the capital gains below a cut-off limit are exempt from CGT, the current cut-off is positioned at £ 11, 100 or lower per year. The gain is calculated by a simple formula of subtracting the original purchase price of the asset from the Sale price.
CGT for Expats:
Our property accountants on capital gains tax have highlighted that Prior to April 6, 2015, British expats and overseas investors were exempt from the CGT in the case of sale of a residential property. However, with a new rule coming into effect, this exemption stands withdrawn. Moreover, this was considered as a loophole in the British taxation system. Overseas investors and British expats were known to have a penchant for investing in buy-to-let properties and generating snug incomes out of the investment.
The new rule implies that any gains made by selling a property in UK post April 6, 2015 may incur a CGT in tune of 28% of the accrued gain. The rate of 28% of the gain is chargeable in case the gain and the income tax are above the minimum cut-off. In case you fall in the category which is below the minimum. GM professional accountants provide expert advice on capital gains tax on uk property.
cut-off, the CGT would be levied on you at the rate of 18%.
CGT on assets acquired through Inheritance:
There are a different set of rules for UK domiciles and non–domicile as far as the Capital Gain Tax on inheritance is concerned. By definition, a person who out of the last 20 years has lived in the UK for a minimum of 17 tax years qualifies to be called a UK domicile.
Inheritance below a cut-off value is exempt from the CGT. Only inheritance evaluated at more than £ 325, 000 or higher attracts CGT. However, to calculate CGT, this cut off amount of £ 325, 000 is deducted from the total evaluated value of the inheritance. Any amount over and above this minimum threshold attracts a CGT at the rate of 40%. Evaluation of the inheritance is inclusive of all the assets (including the assets that are held in trusts), including but not limited to, money, property(ies), any gifts that were given during the period of seven years prior to the death; gifts to trusts or companies over the lifetime (some exceptions are applicable to this particular category).
A non-domicile pays the Capital Gains tax on the assets situated on the UK soil only, in contrast, the domiciles are liable to pay CGT on all assets acquired through inheritance, they may be anywhere in the world.
Private Residence relief and letting relief:
– Private residence relief (PRR): This relief is applicable on the sale of property that has been your principal private residence. In other words, you occupied that property as your own residence. There are a few qualifying conditions for claiming the PRR, starting with the condition that the house was not bought for the purpose of making gains. The house was used as a primary family residence for a stipulated duration during ownership. Inclusive of everything the total area of the house if below 5000 square meters. No part of the house was used for Business or part of the house was sub-let (single lodgers are exempt).
– Letting relief: This relief on Capital Gains Tax is applicable in the case of a property that you used as your private residence for a period of time and then you let it out to someone else at the applicable commercial rate. The foremost requirement whilst claiming the private residence relief is that the onus to prove that you actually lived in that particular house is solely on you. Some investors of buy-to-let category of properties in their quest to prove that the particular house in question was used by them as a private residence, try to adopt dubious means; a practice that shall be avoided at all costs. There exists a list of questionnaire that allows you to prove that the let-out property was also your private residence for a period of time.
UK laws allow you to claim both the private residence relief and letting relief.
Calculating Private Residence Relief and Letting relief:
There is a very simple formula for calculating the PRR. The calculation is done using:
PRR = Total Gain X (period of occupancy / Total period of ownership)
The period of occupancy is calculated by adding 18 months to the time you have actually lived in the house.
The letting relief is capped at a maximum of £ 40, 000.
Call our capital gains tax helpline now on 0208 396 6128