The lowdown on property taxes

Money Talk
By Leonie Kerswill
Tax partner at PricewaterhouseCoopers

Leonie Kerswill of PricewaterhouseCoopers

An increasing number of people are facing tax charges on the sale of their homes where they own more than one property or are selling off land for property development.

However, profits made on the sale of your home are exempt from capital gains tax (CGT) if it is your only or main residence throughout the period of ownership.

The definition of the house includes the main building, and any relevant buildings adjoining it such as a garage or, in some cases, a separate building occupied by staff.

Where the gardens and grounds are up to half a hectare, any gain on their sale is also exempt from CGT.

Where someone has more than half a hectare of land and gardens, these will also be exempt from CGT, as long as they are provided for the "reasonable enjoyment of the property", as the legislation puts it.

But if someone has substantially larger grounds, such as five hectares of gardens attached to a three bedroom semi-detached house, the grounds are unlikely to be totally exempt from CGT.

Unfortunately this is an area of subjective judgement and settling it is down to negotiation with the Revenue.

Other exemptions

Where the property has been a person's principal private residence (PPR) at any time, the last three years of ownership are always exempt from CGT.

Another very valuable relief is the 'lettings exemption' Capital gains tax explained

Additionally, if someone moves out of their home to work abroad these periods of non-occupation would in fact still count as occupation.

So they would also qualify for exemption from capital gains on the condition that the owner moves back into the house on their return to the UK.

If a person uses part of their home exclusively for business purposes then that proportion of the property would not be exempt from CGT on sale.

Exclusive use would, for example, apply to a photographer having a room set aside as a studio as opposed to a translator who occasionally uses the dining room table.

A reasonable apportionment would be applied when calculating the chargeable gain appropriate to the business element.

Letting

Another very valuable relief is something called the lettings exemption, which applies where a house that has been someone's PPR is let as residential accommodation.

This situation might arise where someone moves but decides to keep their old property and let it.

For example, on an eventual sale five years after moving out, capital gains in the final three years of ownership would be covered in any event, as they are covered by PPR relief (see above).

This would leave two years of ownership potentially liable to CGT.

But because the property was let there is an additional exemption available.

The relief is subject to restrictions with an overall maximum of £40,000 of capital gains, but is available to both husband and wife (or civil partners) where the house is in joint names, putting the exempt gain up to £80,000.

CGT would be applied to the gains in those two years if, for instance, the property had been left standing empty.

There are other various exemptions for PPR purposes which are not covered here, such as dependent relatives' accommodation and residences owned by trustee or personal representatives, which extend the PPR relief.

Garden developments

Over the past few years, an increasing number of new residential properties have been built in householders' gardens.

After 5 April 2008 new CGT rules will apply

There appears to be a general misunderstanding that if someone builds a property in their garden and sells it, then it is exempt from tax.

This situation (subject to the half a hectare restriction) depends on who carries out the development.

If the householder sells part of their garden (which was originally less than half a hectare) to a developer then the gain should be covered by the PPR exemption.

If the householder carries out the development themselves, then any eventual profit on disposal will be made up of an increase in the value of the land from garden to a building plot and a profit on the construction of the building.

In this case the profit on the construction would be taxed as income whilst the gain on the land is likely to qualify for PPR relief.

Second properties

There has been substantial growth in the value of properties since the turn of the century and as a result, a large number of investors entered the buy-to-let market.

Buy-to-let landlords must get to grips with CGT

If the buy-to-let property was ever an individual's PPR then on an eventual sale there will be some relief available from CGT.

This will be based on the period of occupation as the PPR, plus the last three years of ownership, plus an element of relief because the property has been let as residential accommodation.

The lettings relief could exempt up to £80,000 of gain between husband and wife or civil partners, which when taken with two annual CGT exemptions (£9,200 for 2007/2008) means that in some cases nearly £100,000 of gain can be realised before any tax becomes payable.

Rates of tax

If there is any gain liable to tax then the tax rate on a disposal this year will depend in part on how long the property has been owned, and in most circumstances will not fall below 24%.

After 5 April 2008 new CGT rules will apply and while we don't yet have the detail of these it is likely that the same gain will only be liable to tax at 18%.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.