Part 1 of this article warned of some of the problems that might follow from the introduction (with effect from 6th April 2020) of the rule that on a disposal of a residential property, a Capital Gains Tax return and a payment of tax must be made within 30 days of the disposal. This article delves into more detail at some of the key issues that may surround this new rule, and also the differential tax rate that applies to disposal of residential property.

Many people have houses with an adjacent paddock, and when the two are sold together the question arises as to whether or not the paddock is part of the garden. HMRC’s guidance states that for most properties the garden can only extend to a maximum of 0.5 hectares, only occasionally is a larger area accepted at the garden.

However there is no guarantee that HMRC will accept that something like a paddock is in fact part of the garden. Issues such as this arise frequently in relation to a claim for Principal Residence exemption from Capital Gains…so if the paddock is not part of the residence for the purposes of exemption, then is its sale the sale of a residential property?

Clearly the answer to this is no it is not, but this is an area where considerable care must be taken. Going on the basis that the sale of the paddock is not a sale of residential land, than it would not need to be included in any return covered by the new rules. It is also very important to note that any tax on the gain would be at 10% or 20%, and not at the higher rates of 18% and 28% applicable to residential land. If part of the land you sell is or is not residential land, there are some interesting issues relating to timing. For example the following scenarios:

1) Seller 1.

In May Seller 1 sells their residential land for a profit of 21,000 and then in August sells shares resulting in a loss of £10,000. Assuming Seller 1 is a higher rate taxpayer he must make his Capital gains Tax return within 30 days of the sale. He will then be able to deduct his annual Capital Gains Tax allowance (in this case we are assuming the allowance is £11,000) reducing the taxable gain to £10,000 on which the tax of £2,800 must be paid. At the end of the year, Seller 1 makes his full tax return and is able to offset the loss on the sale of shares against his gains and will be able to reclaim the Capital Gains Tax. However it may be over a year between the time he paid the tax and the time he will have got it back.

2) Seller 2.

In May Seller 2 sells shares resulting in a loss of £10,000. In August she sells her residential property resulting in a gain of £21,000, in which she dutifully makes her Capital gains return within 30 days of the sale. But she can offset the loss from the sale of shares and her annual allowance against the gain from the sale of the property and will pay no Capital Gains Tax.

From the above we can see that purely by accident of timing Seller 2 is able to obtain an advantage over Seller 1. As far as we are aware this is the way that the new rules will work and if in fact it is the case, then the timing of transactions should be looked at with extra caution.

Lastly with effect from 5th April 2020, there is to be a restriction to the availability of lettings relief. This relief which could be very useful for anyone selling a property which had been their home but had been let out for part of the period of ownership. For example, if a couple who both owned their own house get married and move into one house, lettings relief would not apply to the second house if it was let out for several years prior to the sale. The same would apply to a family posted abroad who let their house out during an overseas posting.

Some of the legislation governing the above is still in draft form and it is possible there could be changes, particularly in light of the outcome of the General Election but Capital Gains Tax is definitely going to have a bigger bite from 5th April 2020.