Q. We own a number of properties and will potentially need to dispose of one or more in the next couple of years. We want to legitimately minimise our tax liability on the sale and wondered what tax planning we should be considering. What advice can you offer?
A. Your main area of concern in disposing of your property is Capital Gains Tax (CGT). This can quite often be a forgotten tax – until a disposal takes place by which time it is too late to undertake any meaningful planning. However, a little forethought and careful planning can result in a reduction in tax.
I say careful planning as probably the worst feature of CGT is the many and varied special rules. No other tax has quite so many complex reliefs for individual situations, nor so long a list of partial or complete exemptions. With any tax planning, CGT or otherwise, we have to be aware of the principle established in the tax case of Furniss v Dawson. Although the principle has undergone some changes since it was initially made, the basic principle still remains, that where there is a scheme comprising a number of preordained steps, one or more of which has no purpose other than to avoid or defer tax, then such steps are to be ignored for tax purposes.
So with this in mind before you can start to consider your tax planning you must identify the following as without a chargeable person, chargeable asset and a disposal a transaction and therefore a chargeable gain cannot take place.
Generally a chargeable person is someone who is resident in the UK for at least part of the year or is ordinarily resident. A chargeable asset includes all forms of property and land as well as chattels and legal rights (unless specifically exempt from tax or the gain taxed as income). And finally a disposal occurs when ownership changes or part or all of the asset ceases to exist.
Most important in any tax planning exercise is timing - especially if the transaction needs to be made quickly to ensure that the date of disposal is before the end of the tax year. In most cases the actual date is easy to ascertain because with most assets the date of disposal is the actual contract date even though the monies may not come through until some days or weeks later or the asset is not conveyed, delivered or transferred until a later date.
However, if a contract includes any conditions or perhaps is subject to the exercise of an option, then the disposal is not deemed to have occurred until those conditions have been met and satisfied as finalised.
One of the basic areas of CGT planning is the transfer of assets to a spouse. Each spouse is entitled to his/her own annual exemption and as transactions between spouses usually occur on a ‘no gain, no loss’ basis any transfer of assets from one spouse to the other prior to disposal can ensure both annual exemptions are fully used.
Care should also be taken where a couple take advantage of this ‘inter-spouse exemption’ and then get divorced. The exemption remains in place and is only applied to assets transferred in the tax year that they live together. Further, they remain ‘connected persons’ until the decree absolute comes through. This rule could have an impact on assets standing at a loss because if the couple are still deemed ‘connected’ then any loss accruing on the disposal of an asset can only be offset against chargeable gains arising on further disposals to that particular person.
Another often used tax planning exercise is to make full use of the annual CGT exemption available to other members of the family. Children, parents and grandparents each have their own annual exempt amount and if it is known that specific assets will increase in value over the years consideration should be given to gifting those assets to other family members, thus enabling them to utilise their annual exemptions over a period of years with no tax liability. For the plan to work there needs to be a reasonable amount of time between the date of the gift and the actual date of sale. It should also not be a condition of the transfer that the asset is sold at a later date, and obviously the transferor cannot benefit from the sale proceeds when the time does come to sell.
In the current economic climate many young people cannot purchase a property without financial assistance from their parents. Where the house is in the name of the child, principal private residence (PPR) relief is possible in the name of the child(ren).
In recent years, many people have taken advantage of buying a property in need of renovation, modernising it and reselling it. So long as this is not undertaken on a serial basis (such that the profit is taxed as under business rules) advantage can be taken of the annual CGT exempt amount. For example, a non-PPR house with land owned by a couple can use four lots of annual exemption by selling the land separately in one tax year and the house in another tax year but preferably not to the same buyer. If the renovation project is undertaken by a number of people then a number of annual exemptions can be used.
However care must be taken that the transaction is not caught by income tax anti-avoidance provisions which relate to development gains and purchases with a view to making a gain. If those tax rules apply, an asset (including property) bought with a view to the realisation of profit are taxable as income rather than under the CGT rules.
I hope I have given you an idea of the areas where it is possible to legitimately reduce a potential CGT liability but this is a vastly complex area and it is essential that professional advice should be obtained before taking any action.
Our tax specialist can be contacted on 01455 852550 should you require any further advice.