Property ownership is often at the root of these disputes and it is important to know who owns what before disposing of an asset – and it is not always the person you think who owns the property and has to pay Capital Gains Tax (CGT) on the disposal.
Three main factors have to be considered when making a property disposal:
Who Profits From the Disposal?
The general rule is tax follows ownership of an asset, so an owner has to account for any gain to the taxman on the disposal of property.
In UK law, property can have two types of owner:
- A legal owner - who is generally named on the title at the Land Registry
- A beneficial owner - who has a financial interest in the property that gives them a right to a share of the proceeds on disposal
Any financial interest is active or passive, for example, an active interest would be occupying a property as a home and a passive interest might be putting up cash for a deposit to buy a property with an agreement the deposit will be repaid out of disposal proceeds.
Sometimes, the legal and beneficial owners are the same people – take a husband and wife who jointly own their home as an example.
What is Property?
CGT rules do not mention residential property as such but talks about assets, of which one is ‘land’.
Unhelpfully, the lawyers who drafted the CGT rules failed to include a definition of land or property. Tax advisers have to look to other laws and notable court cases to try and pin down a legal description.
Land is taken to mean a field or land with buildings or any other man-made structure, land covered with water and any interests or rights in or over land. A building includes a residential property.
Interests or rights can be a legal minefield – but generally mean consent to use land without ownership, like crossing a neighbour’s garden to reach your back door if you live in a terrace house.
Watch Out for the Extras Included in Capital Gains Tax Rules
For instance, if you own a static caravan or a static houseboat and let holidaymakers stay, the same tax reliefs apply to them as furnished holiday lets, and although the law has changed, some extra CGT reliefs are still available.
But these rules don’t apply if the letting is part of a wider business – for instance running a holiday campsite.
Location, location, location
Payment of CGT also depends on where a property is sited and where the owners live.
For a UK resident or ordinarily resident taxpayer, HM Revenue and Customs expects details of any worldwide disposals of property to be reported on a self-assessment return.
The only disposal that generally does not fall under this requirement is selling your main home when the owners have lived there for all the time of ownership.
Where the money goes is a red herring. If you sell a property and put the money in an overseas bank, you still need to report the transaction and pay any tax due in the UK. Non-residents do not pay CGT on disposals of UK property.
The key to paying less CGT is managing tax-effective property ownership before a disposal takes place – trying to reduce the tax burden after the disposal is pointless because ownership cannot be changed retrospectively.