Property (Freehold) - Property Taxation (12)

Question 1

What is capital gains tax in relation to property tax?

Answer 1

Capital Gains Tax: Capital Gains Tax is levied on the profits of chargeable assets made between sale and purchase.

(1) Calculation: Value of sale - costs of sale - costs of acquisition - purchase price/base value in 1982.

(2) Private Residence Relief: Residential sellers can claim relief to exempt them from CGT for sale of a residential home, provided it was their main dwelling for the period of ownership.
Multiple Residences: Individuals with multiple residences can ‘elect’ which will benefit to HMRC.
Trustees: Trustees can benefit, provided property is occupied by beneficiary as primary residence.
Death: Personal Representatives can apply for the relief if conditions were met in life (i.e. if selling to fund IHT).
Absences: Periods of absence are permitted, but subject to strict conditions.
>0.5 Hectare Gardens: If the property has a garden exceeding 0.5 hectares, CGT is chargeable on any profit exceeding 0.5 hectares (unless demonstrates that space was necessary for reasonable enjoyment).
Business Property: Relief may be lost on any part of the house used exclusively for business use.

Question 2

What is stamp duty tax?

Answer 2

Stamp Duty: Stamp Duty is levied on property purchases in England, and is paid by the buyer (LTT in Wales).

(1) Calculation: Tax is levied on purchase price, divided into ‘tax bands’ based on type of property.
>Tax is levied on each band at different rates - there is not one rate for the entire property.

(2) Chattels: Tax is levied on land, not chattels. Apportionments must be fair, lest it may constitute tax fraud.

(3) VAT: SDLT is levied on the total of purchase price plus any inclusive VAT.

Stamp Duty Land Tax (England)
Stamp Duty Land Tax: Stamp Duty Land Tax must be paid to HMRC within 14 days of completion on Form SDLT1.

(1) First-Time Residential: First time purchasers of residential property can claim tax relief, provided it is a property below £625,000 and they intend to live in it.
£0-£425,000: 0%.
£425,000-£625,000: 5%.

(2) Residential: Other residential property (multi-ownership or non-residents subject to higher tax).
£0-£250,000: 0%.
£250,000-£925,000: 5%.
£925,000-£1,500,000: 10%.
Remainder: 12%.

(3) Commercial: Commercial and mixed-use property.
£0-£150,000: 0%.
£150,000-£250,000: 2%.
Remainder: 5%.

Land Transaction Tax (Wales)
Land Transaction Tax: Land Transaction Tax must be paid to the Welsh Revenue Authority within 30 days of completion (LTT Return). There is no first-time buyer relief.

(1) Residential: Residential property (multi-ownership or non-residents subject to higher tax).
£0-£225,000: 0%.
£225,000-£400,000: 6%.
£400,000-£750,000: 10%.
Remainder: 12%.

(2) Commercial: Commercial and mixed-use property.
£0-£225,000: 0%.
£225,000-£250,000: 1%.
£250,000-£1,000,000: 5%.
Remainder: 6%.

Question 3

What is Value Added Tax (VAT)?

Answer 3

Value Added Tax: VAT is levied on taxable supplies, by a taxable person, in the course of business. It therefore does not apply to most residential sales.

(1) Taxable Person: Person whose turnover exceeds £90,000 in the last 12 months, unless voluntarily registered.
>If business supplies only exempt supplies, cannot register for or recover VAT (i.e. insurers).

(2) Calculation: VAT is charged on supplies as ‘output tax’. It is also paid on purchases as ‘input tax’. The sum of output - input is the sum paid to HMRC (must be a direct link between the two, i.e. building supplies to sell house).

(3) Rates: Rates charged at four levels.
Standard: 20%.
Reduced: 5%.
Zero: 0%.
Exempt: No tax (subject to option to tax for some goods).

Residential Transactions
Residential Transactions: Residential sales are non-subject. New build homes are zero rated, and further sales are not in the course of business.

Commercial Transactions
Commercial Transactions: Commercial transactions may be subject, either by default or by option to tax.

(1) Standard Rate: New commercial properties are standard rated (<3 years old).
>Construction/professional services also standard rated for the sake of input tax.

(2) Option to Tax: Sale of old commercial properties and grant of commercial leases are exempt, subject to option to tax at standard rate.
>Only exercised if purchaser can offset it, i.e. is VAT registered. Otherwise, they will seek discount or avoid sale.
>Exercising option means seller can offset their own input tax (i.e. VAT spent on builders).

(3) Full Exemption: The sale of interests, rights, and licences to occupy land are fully exempt.