Capital Taxation

Question 1

What is the statutory basis for capital gains tax?

Answer 1

The Taxation of Chargeable Gains Act 1992

Question 2

What is the statutory basis for IHT?

Answer 2

Inheritance Tax Act 1984

Question 3

What is the statutory basis for SDLT?

Answer 3

The Finance Act 2003

Question 4

What is the basis of value for IHT and CGT?

Answer 4

Market value defined as:

The value the property is expected to sell for if sold on the open market.

The price is not assumed to be reduced on the grounds that the whole property is to be placed on the market at the same time. I.e flooding the market

Question 5

How does the basis for CGT and IHT differ from market value?

Answer 5

For IHT/CGT the value of the properties are not assumed to be reduced because the market has been flooded.

Question 6

What did the Duke of Buccleuch case set out?

Answer 6

Large estates should be ‘prudently lot’ to achieve the best possible price for the property.

Question 7

What did the Lady Fox case set out? (3 key points)

Answer 7

That the property must be valued as it actually existed at the date of valuation.

Even if a prudent seller would likely make some changes or alterations to the property before putting it up for sale.

Thirdly the property is assumed to be capable for sale in the open market even if in reality there are restrictions on sale that prevent it from being the case.

E.P.R
Existed. Prudent. Restrictions.

Question 8

Where is the definition of market value for IHT found?

Answer 8

Section 160 IHT Act 1984

Question 9

What is UK VPGA 15?

Answer 9

Replaces UKGN3

Provides an overview of the statutory basis of market value for IHT, CGT, SDLT and ATED.

Question 10

What is ATED?

Answer 10

Annual tax on enveloped dwellings

ATED is an annual tax payable mainly by companies that own UK residential property over £500k

Question 11

What is inheritance tax?

Answer 11

This taxes the transfer of assets on death and those made during life, in particular this includes gifts made within the last seven years of life.

Question 12

What is the date of valuation for IHT?

Answer 12

The moment before death.

This was designed to ensure interests that terminate on death are treated as part of the estate.

Question 13

What is the IHT threshold?

Answer 13

£325,000

Question 14

What is the tax rate for IHT?

Answer 14

40%

Question 15

What is the nil rate band for IHT?

Answer 15

The value of an estate that is not subject to IHT (under £325,000).

Question 16

Can the nil rate band for IHT be transferred?

Answer 16

Yes, if your estate is being inherited by your spouse or partner they inherit your nil rate band. This means that when they die they can leave an estate worth £650,000 that’s free from inheritance tax.

Question 17

When is the standard 40% rate used in IHT?

Answer 17

On amounts over £325,000

Question 18

What reliefs are available for IHT?

Answer 18

Quick succession relief - this is to prevent estates being decimated by successive beneficiaries dying within a short time of each other.

Agricultural and Woodland relief

Business property relief

Fall is in value relief - where the transfer occurs at a high point in the market and after this date a sale occurs at a lower value. Essentially the relief applies for sales within three years of death. Actual sale is substituted from value at date of death.

Question 19

What is exempt from IHT?

Answer 19

Foreign properties owned by a person living abroad

Transfers between husband and wife or between civil partners are exempt. This applies to both lifetime and death transfers

Annual exemption of £3,000 for lifetime transfers

Outright gifts of up to £250 to any one person are exempt

Lifetime transfers as wedding gifts

Transfers to charities

Question 20

Why did HMRC instruct you to value at 1982?

Answer 20

Valuing as at 31st March 1982 as instructed in The Finance Act 1988.

The reason behind the rebase is that the 1970s saw significant inflation in the UK and it was deemed to be unfair to tax people on the growth in the value of their assets that was simply due to increases in general prices.

Question 21

How would you complete a 1982 valuation working outside of the VOA?

Answer 21

I would use one or all of the following methods:

1. Property market reports on the national archives website available on public domain
2. EIG 1982 records
3. Interrogate my companies records where possible

Question 22

What does undivided shares mean in IHT?

Answer 22

Where a land interest has joint owners or owners in common where each owner shares an entitlement to a share in the property.

Such shares are held under a trust of land.

Question 23

Why did you carry out desktop valuations for your IHT cases?

Answer 23

Had sufficient information to do from the desk

Agreed with client – in working agreement with HMRC

Question 24

Tell me about Wight and Moss v CIR (264 EG 935) 1982 case (Nellie Wight)

Answer 24

Provides us with important guidance on the valuation of undivided half-shares, where a co-owner was in occupation of the property at the valuation date.

Undivided half share in a dwelling house fell to be valued, following the death of one of the joint owner-occupiers.

The DV valued on the basis of the vacant possession value of the house divided by two and then deducting 10%.

The Tribunal approved the DV’s approach though it increased the final deduction to 15%.

Percentage of 10 is derived from the decision in Cust

15% - if in occupation
10% - if not in occupation

Question 25

What is a leasehold?

Answer 25

A leasehold agreement is where you occupy a property interest for a defined period of time from the freeholder.

Question 26

What effect does a short leasehold have on value?

Answer 26

Depends on terms but generally will decrease property value

Question 27

What is the leasehold enfranchisement method?

Answer 27

Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold

Question 28

What law relates to undivided shares for valuations on or after 1 January 1997?

Answer 28

Trusts of Land and Appointment of Trustees Act 1996 (TLATA)

Question 29

What law related to undivided shares for valuations before 1997?

Answer 29

Law of Property Act 1925

Question 30

How do you calculate capital gains tax?

Answer 30

Work out the difference between what was paid for the property and the amount received when sold.

If the gains are over the yearly allowance then tax is due.

e.g. you bought a house for £200,000 and sold it for £250,000. You would have a gain of £50,000

Question 31

What are chargeable assets in relation to CGT?

Answer 31

Assets you pay capital gains tax on when you sell

Question 32

What are examples of chargeable assets CGT?

Answer 32

Most personal possessions worth £6,000 or more apart from your car

Property that is not your main home

Your main home if you’ve let it out, used for exclusive business purposes or its larger than 5,000 sqm

Any shares not in an ISA or Personal equity plan (PEP)

Business assets

Question 33

You do not pay Capital Gains Tax when you sell (or ‘dispose of’) your home if what applies?

Answer 33

You have one home and you’ve lived in it as your main home for all the time you’ve owned it

You have not let part of it out - this does not include having a lodger

You have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)

The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total

You did not buy it just to make a gain

If all these apply you will automatically get a tax relief called Private Residence Relief and will have no tax to pay. If any of them apply, you may have some tax to pay.

Question 34

What is important to remember when valuing undivided shares in land?

Answer 34

Need to remember that I am valuing the particular interest which the transferor has. Not the whole property (Walton v CIR, 1995)

Question 35

What rights does a hypothetical vendor in an undivided share agreement have?

Answer 35

Right to receive appropriate portion of net income

Appropriate share of net sale proceeds

Right to occupy unlet property jointly with other co-owners.

Question 36

What discounts are to be applied when valuing an undivided half-share interest?

Answer 36

10% - where other co-owner is not in occupation and the purpose behind the trust no longer exists

15% - where the other co-owner is not in occupation, but they have a clear right to occupy as main residence and the purpose behind the trust still exists

15% - where the other co-owner is in occupation as their main residence.

Question 37

What RICS guidance relates to capital taxation valuations?

Answer 37

VPGA 15 – UK Red Book supplement

Question 38

Why and how did the IHT rules change?

Answer 38

Residence nil rate band of £175,000 was introduced due to rising property prices

More and more people have been pulled into inheritance tax in recent years.

The property allowance was introduced to help people leave property to family without being hit with large tax bills.

Crucially, you only qualify for this new allowance if your estate includes a property that you’ve used as a home at some point in your life.

Question 39

Does the inheritance tax property allowance apply if I’m not married?

Answer 39

If you are single and have a property in your estate, your heirs will benefit from the main residence nil-rate band.

This means you’ll have the £325,000 nil-rate band, plus an extra £175,000 in 2022-23.

Unmarried couples will not be able to inherit their partners unused nil-rate bands which in effect, double the amount that can be passed on.

Question 40

Why do you inspect properties for IHT?

Answer 40

If we are presenting an alternative value to HMRC we must have undertaken an inspection

Unless: HMRC instruct otherwise, sales particulars are sufficient, recent VOA inspection has occurred, inspection is not safe.

Question 41

How does IHT gifting work?

Answer 41

If you give away your home but continue to live in it rent-free until your death, you’ll be deemed to be the beneficial owner, and it will still be taxed as part of your estate when you pass away.

If you give away a home within your lifetime, it will be classed as a potentially exempt transfer, meaning inheritance tax may be charged if you die within seven years of making the gift.

If the gifts are worth less than the £325,000 allowance, they’ll be added to your estate to work out your taxable estate.

Question 42

Are you aware of any new leasehold reform acts?

Answer 42

Leasehold Reform (Ground Rent) Act 2022

The Leasehold Reform (Ground Rent) Act 2022 comes into force on 30 June 2022, except for retirement properties where it will not come into force before 1 April 2023.

It puts an end to ground rents for new, qualifying long residential leasehold properties in England and Wales.

After the Act comes into force, ground rent in most new leases cannot legally be for anything more than “one peppercorn per year”. This “peppercorn rent” means that no money can be legally charged or paid as ground rent on leases regulated by this Act.

Question 43

Talk me through the reliefs for CGT

Answer 43

Private Residence Relief

You do not pay Capital Gains Tax when you sell (or ‘dispose of’) your home if:
1. you have one home and you’ve lived in it as your main home for all the time you’ve owned it
2. you have not let part of it out - this does not include having a lodger
3. you have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)
4. the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
5. you did not buy it just to make a gain

Question 44

Talk me through the reliefs for SDLT

Answer 44

First time buyer’s relief
- 0% on first £300,000 and 5% on the remainder up to £500,000
- If the purchase price is more than £500,000 you cannot claim the relief and you must pay the standard rates on the total purchase price.

Multiple dwelling relief
- You can claim relief when you buy more than one dwelling where a transaction or a number of linked transactions include freehold or leasehold interests in more than one dwelling.
- If you claim relief, to work out the rate of tax HMRC charge:
divide the total amount paid for the properties by the number of dwellings
work out the tax due on this figure
multiply this amount of tax by the number of dwellings = total (must exceed 1% of total price)
The minimum rate of tax under the relief is 1% of the amount paid for the dwellings.

Charity relief

Compulsory purchases

House builder buys a customer’s home

Question 45

Talk me through the exemptions for CGT

Answer 45

ISA or PEP.

UK government gilts and bonds

Betting or lottery winnings

Main home

Question 46

Talk me through the exemptions for SDLT

Answer 46

• no money or other payment changes hands
• property is left to you in a will
• property is transferred because of divorce or dissolution of a civil partnership
• you buy a freehold property for less than £40,000
• you buy a new or assigned lease of 7 years or more, as long as the premium is less than £40,000 and the annual rent is less than £1,000
• you buy a new or assigned lease of less than 7 years, as long as the amount you pay is less than the residential threshold or non-residential threshold of SDLT

Question 47

What are the Capital Gains Tax rates?

Answer 47

Commercial – 10% lower rate 20% higher rate

Residential – 18% lower rate 24% higher rate

Question 48

What are PETs?

Answer 48

Potentially Exempt Transfers – aka lifetime transfers

Enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax (IHT) if the individual survives for a period of seven years.

If you don’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT