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Practical points - Budget and Finance Acts

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This page has been archived because it is no longer current information but is still relevant, or it is current but over 12 months old
  • Publish date: 04 January 2017
  • Archived on: 31 December 2017

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in practice, policy and legislation related to UK CGT.

   Practical points
195 PRR: no minimum period

A recent decision by the FTT (Stephen Bailey v HMRC TC06085) has confirmed that there is no minimum period of residence to secure the availability of private residence relief (PRR). All that matters is that there has been a period of residence as the only or main home.

Private residence relief is available to shelter a capital gain on disposal where a person occupies a residence as the taxpayer’s only or main home. Where a residence has been occupied as such, the final 18 months (three years for disposals prior to 6 April 2014) is automatically exempt, even if the property has not been occupied as a main residence throughout the period of ownership.

Mr Bailey bought a property (Richmond) in February 2008. The property was initially purchased by his property development company with a bridging loan. Mr Bailey intended to live in it as a home with his children and his partner and her son and to obtain a mortgage to buy the property from his company. He lived in the property for around two and a half months with his children while attempting to sort out his finances. Following the financial crash, he was only able to obtain a buy-to-let mortgage which precluded him living in the property. He took out the mortgage and let the property to a friend who died in early 2010. In May of that year he moved back into the property to undertake decorating with a view to moving in with his family. However, as result of his mental health this did not happen and the property was sold in August 2010 realising a gain. Mr Bailey had another property in Maidstone that he lived in when not in the Richmond property.

The tribunal found that Mr Bailey had lived in the property as his main home, albeit for a short while. It was the quality of occupation that was important, not the length of occupation. As the property had been his main home at some point, the final 36 months of ownership were exempt (the disposal being before 6 April 2014). He had owned the property for less than three years, consequently the full gain was exempt.

It should be noted, however, that the tribunal found in Mr Bailey’s favour despite a lack of documentary evidence in support of his residence and notwithstanding that he had failed to elect for it to be his main residence rather than the Maidstone home. The tribunal relied on his oral evidence.

When advising clients who purchase a second home which they intend to occupy as a family home, it is prudent to document this and also to retain evidence of occupation, however short, such as change of address, forwarding of post, etc. It is also recommended to make an election for the desired property to be the main residence.

As the final 18 months of ownership of a property that has been a main residence is exempt, it can be beneficial to live in a second property for a short period as the main residence in order to secure this relief. Lettings relief may then also be available.

From the weekly newsletter of the Tax Advice Network

194 When is ordinary share capital not ordinary share capital? (The sequel)

As reported in practical point 141 in August 2016, Mr and Mrs McQuillan were initially denied ER as they did not have the required minimum of 5% of the ordinary share capital. This was because in addition to the ‘regular’ ordinary shares – Mr and Mrs McQuillan owned 33% of those – there were 30,000 non-voting preference shares with no rights to dividends, which diluted their holding to below the 5% threshold for ER if the preference shares were classed as ordinary shares.

The definition of ordinary share capital is given in s989, Income Tax Act 2007 as “all the company’s issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits”. Mr and Mrs McQuillan argued that the preference shares had the right to a dividend at a fixed rate of 0% and so they were not part of the ordinary share capital.

HMRC did not agree and denied ER. The taxpayers appealed and the First-tier Tribunal (FTT) agreed with the taxpayers and gave them ER. This decision was at odds with previous cases but did give a ‘fair’ result for the taxpayers who were entrepreneurs.

As anticipated, HMRC appealed and the Upper Tribunal allowed the appeal, denying Mr and Mrs McQuillan ER (HMRC v Michael and Elizabeth McQuillan [2017] UKUT 0344 (TCC)). The tribunal sympathised with the McQuillans, recognising that they were the kind of entrepreneurs for whom the relief was devised. When the preference shares were issued in exchange for a loan, taper relief was still in place and the couple would have qualified for the business asset taper relief of 10%, but the subsequent change in the law to ER denies them relief.

Although the decision is unpalatable for Mr and Mrs McQuillan at least it is now in line with previous cases and allows others to plan ahead with more certainty when structuring share capital.

Contributed by Sue Moore

180 ER: disposal of trust business assets

In September 2011 an HMRC technical adviser wrote to an agent agreeing that where a trust had held a business asset for the necessary period, entrepreneurs’ relief (ER) would be due if an individual had been a qualifying beneficiary for only a short time prior to the disposal. This statement by HMRC was then referred to by the agent in lectures and was widely understood to be HMRC’s position. It is also felt by many to be technically correct under the terms of the legislation.

In the 12 January 2017 HMRC Capital Taxes Liaison Group meeting it was advised that HMRC’s position was that “the individual who was the ‘qualifying beneficiary’ had to be a qualifying beneficiary throughout the stipulated 12-month period. The conditions for relief would not be met if the individual had been ‘parachuted in’ as a beneficiary of the settlement shortly before the trustees’ disposal. This followed from the terms of the statute, which was written in terms of the qualifying beneficiary and not, eg, ‘the individual’.”

The change from the September 2011 HMRC response was pointed out during the discussions that followed and the external representatives highlighted the need for HMRC to specify an effective date from which the corrected interpretation would apply to disposals.

This issue was discussed again at the 29 June 2017 meeting, with the following being an extract from the minutes: “HMRC did not regard the letter sent to an agent by the then technical adviser in September 2011 as amounting to publication of a practice or a generally applicable construction of the statute. HMRC will write to the CIOT and to delegates setting out their view of the operation of section 169J and 169O TCGA (this letter is presently in its second draft form). We expect the letter to attract comment and discussion when it is issued. HMRC will also write to the agent who received the 2011 letter to withdraw the advice given and present the revised view along with a full reply to the queries in the agent’s original enquiry in terms of that view.

“HMRC do not accept that this marks a change in view and so there is no ‘new approach’ to be applied with effect from a given date. If a customer or agent believes they have been disadvantaged by relying on the interpretation of sections 169J and 169O implicit in the 2011 letter then HMRC will consider representations and evidence to that effect on a case-by-case basis.”

Contributed by Lynnette Bober, Rawlinson & Hunter and ICAEW representative on the Capital Taxes Liaison Group

179 Capital Taxes Liaison Group

The HMRC Capital Taxes Liaison Group is a forum for HMRC, HM Treasury and representative professional and business associations to discuss matters relating to capital gains tax (CGT), inheritance tax (IHT) and trusts. ICAEW sends representatives to all meetings.

Various practical points are raised during the meetings, so the minutes are useful reading. The most recent meeting was on 29 June 2017 (the minutes had not been published at the time of writing). This covered a range of issues, two of which provide useful HMRC clarifications, covered in practical points 173 and 180.

 137 PRR: know the facts

When your clients tell you they have sold their home and garden do you assume that the gain will be completely covered by the private residence relief (PRR) for CGT, or do you question them further? Experience shows that establishing the facts can avoid a difficult tax investigation in the future.

In Mr & Mrs Ritchie v HMRC TC05911, Billy and Hazel Ritchie sold their home, which included grounds of about 0.7 hectares, for £2m in 2007. Their first mistake was to pay the proceeds into their business bank account. Their second mistake was not to declare the gain on their SA tax returns.

They did tell their accountant about the disposal, who, as he was not a CGT expert, sent Billy to see a tax adviser (Russell). However, Russell failed to ask these key questions:

  1. When was the house and land acquired?
  2. For what period did they occupy the property as their main residence?
  3. Was all the land required for the reasonable enjoyment of the home?

Russell told Billy that on the basis of what he had told him (but he didn’t ask the key questions) PRR should potentially be available for the full gain. Billy reported back to his accountant that the gain was exempt. However, the accountant and tax adviser did not talk directly to each other to clarify any possible misunderstandings. This lack of communication to confirm the tax adviser’s opinion was the third mistake in this case.

In fact the Ritchies had acquired the land in 1987 and built their house on it. They moved into that house in 1995, so they could not have occupied the property as their main residence for their entire ownership period; some part of the period would fall outside of the PRR exemption.

Land of up to 0.5 hectares is the “permitted area” which is automatically covered by PRR when the land is used in association with a home for which that exemption applies. In this case the grounds of 0.7 hectares were larger than those of similar neighbouring properties, but Billy used a shed which was 85m from the house for his hobbies. The tax tribunal ruled that this shed was used as part of the dwelling, which effectively extended the permitted area. However, it would have saved a lot of hassle if this fact had been established at the time of the disposal and declared on the tax returns.

From the weekly newsletter of the Tax Advice Network

 136 Fall in sterling and unexpected gains

Mary came to see me last month to discuss the sale of her second home in Florida for $300,000 during December 2016. She had paid $320,000 when she purchased the property back in 2008, so had lost $20,000.

There was no US tax payable on the sale; for US tax purposes this resulted in a $20,000 loss. Shock is truthfully an extremely polite way of expressing Mary’s reaction once she learned that she would owe UK CGT on a gain of £80,000 – having been certain in her mind that there was a capital loss! I had to explain that for UK CGT the proceeds were equal to £240,000 ($300,000 converted at 1.25), while the cost was just £160,000 ($320,000 converted at 2.00).

This unexpected result arises because capital gains are calculated in sterling using spot exchange rates at the dates of each transaction. The leading cases – Bentley v Pike Ch D [1981] 33 TC 491 and Capcount Trading v Evans CA [1992] 65 TC 545 – concern CGT on chargeable gains accruing on the disposal of an asset. These state that if there is an acquisition and disposal in a foreign currency, the taxable capital gain is calculated by deducting the sterling value of the cost at the time of acquisition from the sterling value of the sale proceeds at the time of sale. In Mary’s circumstances, there is a large gain in sterling simply because sterling had fallen in value from an exchange rate of £1.00 being equal to $2.00 in 2008, to $1.25 by December 2016.

HMRC’s Capital Gains Manual at CG78310 states: “You should not accept a contention that the gain or loss on an asset acquired and disposed of for foreign currency should itself be computed in foreign currency and then converted into sterling at the rate ruling at the time of the disposal of the asset.”

Because sterling fell very sharply after the Brexit vote on 23 June 2016, many other clients who similarly sold non-UK assets after that date could find themselves with unexpectedly large UK CGT liabilities.

Contributed by David Treitel of American Tax Returns Ltd

135 Late NRCGT returns: no daily penalties

We have received clarification from HMRC on its approach to charging penalties for failure to submit non-resident capital gains tax (NRCGT) returns. Specifically, it is using its discretion not to charge daily penalties. NRCGT came into effect on 6 April 2015 (introduced by s37 and Sch 7, FA 2015) and applies to gains accruing on UK residential property on or after that date.

Tax is payable if the property is disposed of while the vendor was not resident for tax purposes in the UK. If the taxpayer was UK-resident at that time, normal CGT or corporation tax would be payable. NRCGT is charged at the rate of CGT or corporation tax which would apply if the taxpayer had been UK-resident.

The reporting requirement is that every taxpayer subject to NRCGT must make a report of the disposal to HMRC within 30 days of the completion date. The NRCGT return has to be filed within 30 days and if the individual is not in SA any tax due has to be paid at the same time. This means that a husband and wife (for example) may have different payment dates. Based on a discussion on our tax forum, the reporting requirement is catching people out. The problem is that many people – including conveyancing solicitors – are unaware of the filing requirement, and as many sales result in no tax payable, it would not occur to individuals that a tax return was required.

Those individuals who are in SA will get caught and charged a penalty when they report the sale in their SA return; and those not in SA are unlikely to be caught if they do not tell HMRC about the sale, particularly if there is no tax to pay. The clarification from HMRC states:

“The penalties for the late filing of an NRCGT return are in line with late filing penalties for other types of return; the amount of penalty applicable depends on the degree to which the return is late:

  • there is an initial penalty of £100 in all cases;
  • plus a further penalty of 5% of the tax due or £300 if greater for returns over six months late;
  • plus a further penalty of 5% of the tax due or £300 if greater for returns over 12 months late.

“Additionally, HMRC has discretion to charge penalties of £10 per day for returns that are filed between three and six months late. “These penalties can be appealed if there is a reasonable justification for the return being late. “Following representations from a number of customers and agents HMRC has reviewed its position with regard to the £10 daily penalties. HMRC can confirm that it no longer issues these penalties for late NRCGT returns and past penalties will be withdrawn.” The clarification from HMRC does not change the statutory position.

Contributed by Caroline Miskin