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Property And Capital Gains Tax


Julie Butler - Expert Author

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17 February 2012

There are many who take a very blasé “mine by right” approach to the principal private residence and capital gains tax. 

There have however been some recent Tribunal cases which have proven that HMRC respect this very favourable tax relief but do come down very heavily on anybody who take advantage of it and that would include lack of evidence about substantial occupation of the property, i.e. the property not really being the principal private residence.

It does mean that any gains on the property are completely free of tax and there is a three years after the date of sale when principal private residence relief still applies. 

For those with a second property, there can again be a little bit of taking for granted of the relief along with an assumption that possibly it applies to the second property.  However this is not the case and a careful review of the second property and exactly what is the principal private residence should be undertaken by all those taxpayers who do live in more than one property.  It is an area that HMRC are looking at closely and should be treated with respect.

Once a taxpayers has made a profit on a residential property it can be quite an addictive passion and the television programmes would encourage this property renovation as an exciting hobby.

Many taxpayers would like to improve a property and then sell it, make a gain and have this gain taxed within the capital gains tax regime, i.e. with a maximum rate of 28% as opposed to the top income tax rate of 40% or 50% and to take advantage of the annual exemption for capital gains tax.  If the project is undertaken by a number of people, then obviously a number of annual exemptions for capital gains tax could be used here.

The tax rules state that any property bought with a view to a realisation of a profit should be taxed to income tax as opposed to capital gains tax and again, property owners should beware.

The same would apply to many buy to let owners where the interest exceeds the income and improvements to the property and therefore they do not think that the income has to be disclosed on their tax return, even if it shows a loss, when in actual fact it does all have to be recorded.

Another area of capital gains tax problems can be where parents purchase a property for their children through the well known means of “the bank of mum and dad”.  It must be very careful as to who is actually in the property, who is buying the property, to whom the principal private residence relief, if any, would apply and if the property is being sub-let, where this income is being recorded.  There are tax planning opportunities here because if the property is purchased by, for example, a university student or newly employed child it can be a good use of annual exemptions.  It can also be a way of passing the wealth down to the next generation for inheritance tax and there can be some huge advantages (subject to the potentially exempt transfer rules).  It could well be that part of the capital gain or indeed all of the capital gain where the house is in the name of the child would actually qualify for principal private residence relief in the name of the children.

The practical tax planning point is to review all residential property for tax planning purposes and act now.  If the taxpayer is planning to move, planning to purchase a second property, buy to let, furnished holiday lets, homes for the children, then they must seek professional advice as it is very complicated in all areas.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540 and Stanley: Taxation of Farmers and Landowners (LexisNexis)

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Article Published/Sorted/Amended on Scopulus 2012-07-10 13:32:58 in Tax Articles

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