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Tax and residential property

15 October 12

The tax implications of acquiring, letting and disposing of residential property ("When the agent answers", in this issue, is an extract from this article)

by Lesley Rance

Tax legislation in relation to residential property applies in many more situations than just a simple purchaser/seller arrangement. This article gives an overview of the tax implications of all the stages relating to the ownership of property.

1. Acquiring

Most people acquire a house by ordinary purchase and in the main, residential properties are bought by individuals primarily as a home. The first tax to be encountered in this journey, therefore, is stamp duty land tax. Some readers will have extensive experience of this and others not so much, so I intend neither to baffle the unfamiliar nor bore the experienced and will simply outline the basics.

Stamp duty is generally payable on the purchase or transfer of property or land in the UK where the amount paid is above a certain threshold. Currently, the threshold is £125,000. Various rules apply for working out how much, if any, tax is payable and the calculation – which is based on a value called the “chargeable consideration” – can vary depending on whether the land is residential or non-residential, leased, or on other factors such as whether several transactions are linked. But for the purposes of this article, let’s assume the property in question is ordinary residential property.

Thresholds

Broadly speaking, if the amount paid is above the threshold, tax is charged as a percentage of that amount. The rates at the moment are 1% on purchase price over £125,000 and up to £250,000, with the rates gradually increasing, first to 3% on transactions up to £500,000, 4% on transactions up to £1 million, and 5% where the price is over £1 million.

If the value is above the payment threshold, tax is charged at the appropriate rate on the whole of the amount paid, there is no question that any of it is liable at the zero rate with only the balance over the threshold being charged at the higher amount. So, for example, where a house is bought for £130,000, it is not the case that £125,000 is exempt and £5,000 is chargeable: the full £130,000 is charged at 1%, so £1,300 is due.

Most UK land and property transactions have to be notified to the Revenue on a stamp duty land tax return within a certain time limit, even if no tax is due. However, there are also some types of transactions that are exempt from SDLT regardless of their value and therefore don’t need to be notified. These include:

  • transactions where no money changes hands;
  • property that is left in a will;
  • transfers of property in a divorce or when a civil partnership is dissolved.

All transactions valued at £40,000 or more must be notified within 30 days of the “effective date” of the transaction, which for most land and property purchases is the completion date. If the transaction value is above the threshold, the payment also must be sent within this time limit, and if the return and payment are not received within 30 days, a penalty will be charged and interest will be applied. A stamp duty land tax certificate, without which the property cannot be registered, will be issued by HMRC on receipt of a valid SDLT return.

Non-purchase acquisitions

As mentioned above, an SDLT return is not required if the property has been left to someone by will and, of course, inheritance is another way by which individuals will acquire property. There are no major tax implications when that occurs, although there may be during, and will be on termination of, that ownership, as we will see later.

Property may also be acquired when assets in trust vest in a beneficiary. Again, there will be no major implications when vesting occurs, because in many cases the asset will be treated as having been acquired at market value. However, there may be cases where the acquisition value is less than the market value because the asset is subject to a claim for CGT holdover relief. This avoids the tax hit on vesting, effectively deferring it until the beneficiary comes to sell.

So now that the house is bought, what is the next tax to bite? Well, for most people, probably council tax, although that is really outwith the scope of this article. However, there really aren’t any other significant tax considerations to be borne in mind on a regular basis unless the property is rented out.

2. Letting of residential property

This is a much bigger topic and there are several significant areas within it. Most straightforward, if tax is ever straightforward, is when a room in the property is let out. The rent-a-room provisions apply to owner occupiers who receive rent from letting furnished accommodation in their only or main home. If the gross receipts are less than £4,250 then they are exempt from income tax. Simple. This limit has not risen since 1997-98 tax year, so it is not worth anything like as much as it used to be, but it will still be of value for anyone who let out a room in their home in and around the Olympic venues this summer, and it is possible that some practitioners will be including claims in client tax returns this year for the first time.

However, more often, rather than just one room, owners decide to let out the whole house, for example where the owner’s work requires them to live away from home for a lengthy period of time, or where a couple have decided to marry or live together when both previously owned their own home. Or perhaps a house has been inherited and rather than sell, the beneficiary decides to use it to generate income. Income, of course, is the key word here, and the one HMRC are most interested in, because if someone is getting rent from a property, they consider that to be income from a business and are going to want tax on it.

There are basically two methods of calculating the profit from a business, the accruals basis and the cash basis, the difference primarily being one of timing. The more acceptable method as it relates to actual trading organisations is the accruals basis, the computation of which requires accounts to be drawn up in accordance with strict accounting principles and which reflects income when it is earned as opposed to actually paid, and expenses when they are incurred as opposed to when they become due for payment. However, for traders with minimal turnover – which would include most cases of residential letting of a family home – the cash basis is perfectly acceptable and certainly much more straightforward. This records revenue when cash is received, and expenses when they are actually paid.

The profit from rent is included in calculating a taxpayer’s total income, from which personal allowance (subject to it being within the clawback limits etc) is deducted as normal.

The business of letting

So, what is a property business? HMRC have a useful Property Income Manual that can be accessed online and it gives a huge amount of information on the subject. In the context of this article, it means rent received from renting out a family home, but you should be aware that there are many other receipts that arise from the ownership of land and property that are treated as a property business. Wayleave payments, sporting rights, even rights for tipping or other disposal of waste on land are all derived from exploiting the owner’s interest in the land, and are therefore included.

Anyone who owns or otherwise has an interest in land or property in the UK which produces rents or other receipts liable to income or corporation tax is treated as carrying on a rental business. That applies even if the owner engages an agent to handle matters for them. Readers working in legal firms might well deal with many clients who let out property for rent which their firm collects. Some of these will be corporate entities, in which case, irrespective of whether the rents are minor or significant, they will be included in the company accounts. Where the landlords are individuals, however, they personally have an obligation to declare the rental income to the Revenue, and will pay any tax due on it through the self assessment system.

One issue, however, is that although collection agents, including solicitors’ firms, are happy to deal with the factoring of a property, they sometimes omit to fully advise the client of their tax obligations, with the result that income could be undeclared to HMRC. Practitioners cannot force a client to tell the tax office that they are receiving untaxed rental income and – ignoring any reporting requirements under the money laundering regulations – certainly cannot tell HMRC themselves, but they do nevertheless have an obligation to tell the client that they have an obligation to declare the income.

It doesn’t matter if there won’t be any profit at the end of the year (for example, if there has been a significant amount of expenditure which has outweighed income): the mere fact of them receiving untaxed income is sufficient. And it doesn’t matter if they are not UK resident: for tax purposes, non-residents are liable to tax on income that arises in the UK, even if they don’t stay here. In practice, however, double taxation relief is available where income is taxed in both the UK and the country in which they do reside.

As to how the Revenue might find out, if the client doesn’t tell them that they are getting rental income, in the past there really was no mechanism that would do this. Basically it came down to word of mouth, possibly an anonymous tip to the tax office. But the landlord registration system now provides a significant database and you can bet that there will be staff in HMRC offices around the country tasked with trawling through this to see if they can identify taxpayers who are on the list but who have not declared the income to them.

This untaxed income source is now much more difficult to hide than it used to be. So if, after advising the client that they should inform HMRC they are receiving rental income, you get the impression they are unlikely to do so, you should probably point out that they are quite likely to be found out, and will then be faced with possible penalties for non-disclosure of income and evasion of tax, which could cost them dear in the long run. Professional standards also dictate that you should seriously consider whether you can continue to act for them in the face of their refusal to fully declare their income to HMRC.

Domestic partners

As for the rent arising, where the landlords are husband and wife, or civil partners, they are generally treated as entitled in equal shares to income from jointly held property unless:

  • the income actually is earned: that is, it comes from a business that is run on a commercial basis, for example where a portfolio of several properties is held;
  • there actually is a partnership, in which case the income is shared in accordance with the partnership agreement;

     

  • both parties have signed a declaration stating their beneficial interest in both the property and the income arising from it.

You should be aware that if the last point applies, then the interest in the property and the income share have to be the same, so if the home is owned 50:50, the rent cannot all be assessed 100% on one party just to make use of their otherwise unused or lower tax rates.

Normally it is the person who carries on the rental business who is charged to tax, although the law actually says that the tax charge falls on the “person receiving or entitled to the profits”. In most cases the person entitled to the rental income will also be the person who receives it, but the reverse isn’t necessarily the case. Different people could be involved where, for example, the landlord engages an agent to handle the rental business. The landlord will then carry on the rental business through the agent. The agent may be the one who receives the rent, but he is simply an intermediary: it is still be the landlord who is chargeable to tax.

3. Non-resident landlords

Having said that, however, I’m now going to contradict myself slightly by pointing out that there are instances where a tax obligation is placed upon an agent, and while I’m at it, I’ll also contradict the point I made above, when I suggested that practitioners had no power to inform HMRC of any client who receives rental income. There is actually one area where we not only can tell the Revenue but where we are, in fact, obliged to tell them, and that’s when the Non-Resident Landlord scheme applies; in short, when the landlord lives abroad.

Although HMRC refers to “non-resident” landlords, it is usual place of abodeand notnon-residence that determines whether a landlord is within the scheme or not. In the case of individuals, the Revenue normally regards an absence from the UK of six months or more as meaning that a person has a usual place of abode outside the UK.

Basics of the scheme

The NRL scheme puts into effect the legislation contained in the Taxation of Income from Land (Non-Residents) Regulations 1995 and applies to:

  • Letting agents who handle or control UK letting income on behalf of a landlord whose usual place of abode is outside the UK; and
  • tenants who make payments directly to a landlord whose usual place of abode is outside the UK.

The scheme requires UK letting agents to deduct basic rate tax from any rent they collect for non-resident landlords on a quarterly basis, to 30 June, 30 September, 31 December and 31 March. The basic calculation in determining what to tax is rents received less deductible expenses, and in doing so, we are looking at a cash basis, so it is the date the letting agents/tenants actually receive and pay the rents or expenses that is relevant, not the periods for which the rents or expenses are due. This resulting “income less expenses” figure is then taxed at the basic rate of 20% and that sum is paid over to HMRC.

The non-resident landlord will get credit for this tax which has been paid and will be given a tax certificate prepared by the agent. The agent also has to complete and submit a quarterly return and then, after the end of each tax year, an annual return, which not only includes details about the landlords for whom tax has been deducted but also for any non-resident landlords who have successfully applied for approval to receive rents without tax being deducted.

Non-resident landlords can apply to receive their rent gross on the basis that:

  • their UK tax affairs are up to date; or
  • they haven’t had any UK tax obligations before they applied; or
  • they don’t expect to be liable to UK income tax for the year in which they apply; or
  • they are not liable to pay UK tax because they are sovereign immunes (these are generally foreign heads of state, governments or government departments).

Non-resident landlords who are eligible can apply for approval to receive their UK rental income gross at any time, and this includes applying before they have left the UK or even before the letting has started. So if you are ever in conversation with any client who says they are thinking of going abroad and renting out their house, you should make them aware that they will fall within the NRL scheme, but point out that they could make things much easier simply by applying for authority for the rents to be paid gross.

Benefits for agents

Application is straightforward, by completing a form NRL1 which can be downloaded, with guidance notes, from the HMRC website. Approval is usually backdated to the beginning of the quarter in which the application is made, so it’s obviously better to apply sooner rather than later: apart from the obvious benefit of getting rent without having it taxed first, it makes the administration and associated paperwork the letting agents have to do much more straightforward when approval is in place.

It saves time in not having to (a) review the rents received and expenses incurred by every non-authorised landlord every quarter: that can be done at the end of the year for the annual return; (b) calculate the assessable amount and then the tax due on it, and paying it over to HMRC, and (c) complete the annual tax certificates each year for every “unauthorised” landlord.

It also saves the problems that arise when a landlord has arranged to have the net rents credited to his bank account every month, but gets less than he bargained for because of the retention for tax; or, even worse, has it all paid over to him and the agent then realises at some later point that it has to be included in the annual NRL return. This brings forth the problem of ensuring a bigger retention is kept back from the next rent payment, and having to explain to the client why that is, or of asking for the tax element to be handed back or – heaven forbid – of the firm meeting the tax cost in the interests of keeping face, and the client! Another reason in favour of clearly explaining the tax implications at the outset.

It’s worth mentioning though that, even where authority has been given by HMRC to have the rent paid gross, it is still liable to UK tax, so all non-resident landlords have to include the rental income in any tax return HMRC sends them.

The unsuspecting tenant

Anyone care to have a guess at what is meant to happen if there is no agent in place: how does the scheme apply when the tenant pays their rent direct to the non-resident landlord? Well, unless the rent is less than £100 per week, the tenant has to comply with the terms of the NRL scheme. They have to retain and pay over the tax each quarter, give the non-resident landlord a tax deduction certificate and complete an annual return.

I would imagine that in most cases, the tenant is unlikely to know all the expenses that will have been incurred by the landlord, as many – mortgage, insurance etc – would be paid by the landlord themselves, so in practice, they would just keep back 20% of the rent due, and send that off to the Revenue every quarter. I say “in practice”, but I actually have no knowledge of how many such cases exist, so perhaps I should say “theoretically”. In reality, I suspect there are a significant number of tenants and landlords who have never even heard of the NRL scheme, so “in practice” are likely to be doing absolutely nothing about it!

Essential admin

Firms, legal or otherwise, who are registered as a letting agent for the purposes of the NRL scheme will routinely be sent quarterly and annual returns and have to include in these, details for all clients who fall within the scheme. Unfortunately, however, unless these firms have a robust system in place to ensure that the person with the responsibility of completing the forms is kept fully informed, there is a danger that clients will be missed from the return.

To complete these properly, it is, therefore, essential to keep a note of:

  • any new clients for whom rents are collected where the clients are, or will soon be, non-resident;
  • any existing clients who have to date been UK resident and receiving rents from a UK property, but who are about to become non-resident;
  • any clients who are already included within the NRL scheme who come back to the UK (and who are, therefore, no longer non-resident);
  • any clients who cease renting out the property. And note, the cessation has to be a permanent cessation; it won’t apply if the property is simply vacant for an extended period.

And although it might seem like stating the obvious, it is necessary to know the client’s address abroad, their “place of abode”. Particularly with clients living some distance away, correspondence is frequently via email or telephone so there are no letters being sent out and no clear evidence of the foreign address, but very often agents don’t make the effort to note this. A UK address, even the former home to which they might eventually intend to return, or that of a parent or friend, is not appropriate, and neither a PO box number nor a “care of” address are sufficient for HMRC.

Armed with all the correct information, the quarterly and annual returns can then be completed and the correct amount of tax paid. It should be noted that it is the letting agents who must comply with the obligations under the NRL scheme, so the consequences of getting it wrong will impact on them. If incorrect returns are made, leading to insufficient tax being paid, there is a risk of penalties and interest being due which the letting agent, not the landlord, will have to pay.

There is an extensive set of “Guidance Notes for Letting Agents and Tenants” that can be downloaded from the HMRC site, and it gives detailed guidance on how to operate the Non-Resident Landlord scheme. Anyone who has any involvement with any clients who are non-resident and let out property in the UK, where they or their firm act as letting agent, should take the time to read these, so that they are aware of any action they might need to take to ensure compliance with their obligations under the scheme.

So now we come to the final stage in the journey,

4. Disposing of the property

It is to be hoped that most clients make a profit when they come to sell their homes. There will be cases where that doesn’t apply but generally, if they sell the house for more than they bought it, there will be a capital gain. So how come they don’t all have to pay tax on it? Well, of course, if the property in question has been the client’s family home, principal private residence relief will cover the gain.

PPR relief is due under s 222 of the Taxation of Chargeable Gains Act 1992. It is available when a homeowner sells a property which has been used as the only home or main residence, and where it has been used as a home and nothing else. Most cases will be eligible for the relief in full, but it will be restricted if the garden grounds are greater than the permitted area. Permitted area is generally 5,000 square metres, which is roughly the size of a football field.

However, an area greater than 5,000 square metres can also qualify if it is required for the reasonable enjoyment of the whole or part of the dwellinghouse as a residence, having regard to its size and character. Basically that means a big old country house with a huge rambling garden would probably qualify, even if it is more than 5,000 square metres. This already long topic would be stretched considerably further if I were to go into more details; suffice to say there is a wealth of case law on the subject of permitted area and the extent to which subsidiary buildings may form part of the residence.

PPR relief will also be restricted if any part of the house has been exclusively used for business purposes, or has been let. And it will be denied completely if the main reason for buying the property in the first place was to make a profit on sale. That often takes people by surprise because they automatically assume that, if you sell your house, there won’t be any tax to pay. That is simply not the case. Gone are the days when the man in the street could relatively easily take out a second mortgage to buy an off-plan house, knowing they could sell on almost immediately and make a killing, but it does still happen and conveyancers should be wise to it and other scenarios where a quick buck is to be had, and advise clients accordingly.

Non-sale disposals

So PPR relief will apply to the majority of residential sales that family solicitors deal with. However, a disposal can happen in other ways than by sale. If property is gifted from a parent to a child, it doesn’t matter that no money changes hands, it is still a disposal for capital gains tax purposes. Very often no gain will arise anyway because the property is the parents’ own home, so PPR relief will apply, but that is not always the case.

For capital gains tax purposes, if the disposal is between connected persons, the market value rule applies, and the property is treated as having been disposed of by the transferor and acquired by the transferee, at market value, at the date of transfer. Very often though, because the property has not been marketed and sold in the normal way, a valuation will not have been done.

In that case, the best scenario is that the property was always the parents’ residence and has become and will always remain the residence of the child, so PPR will always come into play, so there will be no question of any tax being at stake. But, as I’m sure we have all seen, sometimes that isn’t the case. Maybe the transferee has another home, or the house is transferred to several siblings, either of which issues will complicate matters and require an acquisition value so that any gain on a subsequent disposal can be determined.

Working it out

The basic calculation of gain arising on sale is proceeds minus any costs associated with the sale (for example legal costs and survey reports etc), to get the net proceeds. From that, you deduct the costs of acquiring the property, whether that is by actual purchase or, where the property has been inherited, at its market value at that time. You would also deduct any additional capital expenditure on the property since you bought it, and when you’ve done all that, you arrive at the gain.

Sale proceeds                                                          £A      

Less legal and other costs of sale                            £B      

Net proceeds                                                            £C                    

            Less acquisition costs                     £D                              

            Plus legal and other costs                                                 

           of acquisition                                    £E                  

                                                                                  £F        

            Gain                                                              £G

If the property has been the taxpayer’s principal private residence throughout the period of ownership, all of the gain is covered by PPR relief, and for the vast majority of residential dwellings that are sold, that is the case. Even if the taxpayer didn’t live in the home for all of the time that they owned it, they may still be entitled to the full amount of private residence relief. For example, if it wasn’t possible to sell the old home, or there was a delay in taking up residence due to a need to refurbish the new home, relief can still be obtained. As long as residence is taken up within 12 months, the full relief will be due. In fact, the 12 month limit may be extended to two years in exceptional circumstances, and in the current climate, there are likely to be more instances of this than was previously the case.

It may also be possible to get the full relief in other circumstances even when the taxpayer has not lived in the property, as long as the “qualifying period” test is satisfied. In other words, despite the taxpayer being absent from the property for a given period, the relief still applies. The qualifying periods of absence are:

  • The final 36 months that it is owned. This is automatically treated as qualifying, as long as it remained the only or main home at some time during the period of ownership.
  • Any period of absence abroad in an employment, all the duties of which are performed abroad. I would stress the legislation here only covers employment: there doesn’t seem to be any qualifying period if it is self employment that takes the taxpayer abroad.
  • Up to four years, whether in a single period or not, where self employment or the duties of a UK employment require the taxpayer to live elsewhere.

In fact, that last provision is extended when an individual is prevented from resuming residence because the terms of their employment require them to live elsewhere for the better performance of their duties. That would cover, for example, employees who live in tied houses and suchlike. There can, therefore, be long period of absence without losing any part of this valuable CGT exemption.

Using part of the house in the course of running a business from home does not necessarily result in a loss of full relief, as long as no part of the property is alienated and used solely for the business. The taxpayer should continue to use all of the house as a home, so for example the room used as an office is also used as a guest bedroom.

Letting: a valuable relief

Letting out a bedroom under the rent-a-room scheme mentioned earlier would not affect a claim as PPR, but where the whole house has been let out as residential accommodation, it may not be possible to get full PPR relief on sale. However, it may be possible to get another relief known as “letting relief”. This is an extremely valuable relief and, in practice, and certainly in my own experience, the combination of it and PPR relief very often covers any gain that arises.

Relief is due where a gain to which TCGA92, s 222 applies arises to an individual: in other words, where someone has made a gain on selling their home which is eligible for PPR relief, as long as part or all of the home has at some time been let as residential accommodation and part of the gain can be attributed to the let part, then relief can be claimed.

The maximum amount of letting relief due is the lowest of

  • £40,000;
  • the amount of private residence relief due;
  • the amount of gain made on the let part of the property.

By way of example, Mr A used 60% of his house as his home and let out the other 40%. He sold the property, making a gain of £60,000. He is entitled to private residence relief of £36,000 on the part used as his home (60% of the £60,000 gain). The remaining gain on the part of his home that has been let is £24,000.

In this case, the maximum letting relief due is £24,000 because this is the lowest of:

  • £40,000 (the statutory figure;
  • £36,000 (the private residence relief due); and
  • £24,000 (the gain on the part of the property that has been let).

So there is no capital gains tax to pay here: the gain of £60,000 is fully covered by private residence relief of £36,000 and letting relief of £24,000.

Genuine claims?

There are a few situations to watch out for, however, as regards whether a claim for PPR is going to succeed. First, owning more than one home: if an individual lives in – not just owns – more than one property they can nominate one as their main home. The nomination has to be made within a two year period of acquiring the additional residence. If no election is made, then the Revenue will decide the issue as a question of fact. There is no set time of occupation laid down in the legislation; it is really a question of fact, so things like actual occupation, having mail delivered there, being on the council tax list, are all evidence in support of it being the main residence. This can be valuable for clients with two homes and, if their lives permit it, serious consideration should be given to moving house for a time because it could significantly reduce the CGT that has to be paid.

However, it does still have to be genuine. I had one client who had bought a house, primarily to do up and sell on, so there actually wasn’t any PPR relief due anyway, but nevertheless he tried to persuade me that he had “virtually” lived in the property for weeks on end while he was doing it up, even although, by his own admission, at times it was pretty much uninhabitable. He hoped to argue his residence on the basis that he was registered for council tax at that address. However, on further investigation, it transpired that although he was, indeed, registered, he was actually claiming exemption from council tax because it was unoccupied! You can’t have it both ways.

Secondly, husbands and wives, and civil partnerships who own two or more homes between them, have to make a nomination for main residence jointly. Each party cannot have different homes for tax purposes: they are only entitled to claim one home between them as their PPR.

Thirdly, elderly homeowners going into care. In most cases, this isn’t an really issue, because very often the home is sold to pay for the nursing home fees anyway. Occasionally, however, the sale doesn’t take place until some time after the person has gone into care, whether that is because it wasn’t known whether the care arrangements would be permanent, or possibly the home was let out to fund the care fees, but there is a problem if the sale takes place more than three years after residence has ended. As I mentioned above, the last three years of occupation are automatically covered by PPR relief, and the actual period of occupation prior to going into care is also covered, but there could well be a period between these two that doesn’t qualify for PPR, albeit it is likely to be quite small proportionately. But it is a factor that should be brought to a client’s attention when advising the family what to do about the house.

Reporting obligations

So, once we have determined the gain, and what reliefs can be set against it, this all has to be reported to the Revenue. In most cases, however, no actual reporting is either done or, in fact, really required, because the property in question is a principal private residence and relief is automatically due. However, the question is strict: if chargeable assets of more than £42,400 (as a handy reckoner, this figure is always four times the annual CGT exempt amount) are disposed of, or if chargeable gains before the deduction of any losses are more than the CGT exemption of £10,600, the disposal has to be declared to HMRC. In the old days, a letter to the tax office with all the relevant details would suffice, but very few Revenue staff are prepared to risk using their common sense nowadays, and inevitably a tax return has to be issued.

I should just mention that, when selling, it is the date that missives are concluded that is important for CGT, not the date the money changes hands. In most cases there may only be a few weeks before one event and the next, and both may anyway fall into the same tax year, but the distinction is important, first, because if the two events are in different tax years, different rates and exemptions will probably apply. Secondly, if there has been a change in the tax rate mid-year, as happened in 2010 when the rate jumped from 18% to 28% in June of that year, different rates could apply in the same tax year. It is important to make sure that the correct disposal date is identified, otherwise there is a risk of underpaying tax of what could be quite a considerable sum, or even overpaying it if the rate goes down, although the chances of that happening are less. So it’s very important to get the right date, and therefore tax rate, because if the Revenue think an incorrect return has been delivered, whether carelessly or deliberately, they will invoke the penalty procedure which could prove much more costly to the taxpayer.

So the disposal has been reported for the correct tax year. If any tax is due, it will be payable by 31 January following the end of that tax year. In practice, that could more than 21 months later. For example, if the disposal took place on 6 April 2011, tax would be payable by 31 January 2013. Clients should, therefore, be advised to set sufficient aside to cover the liability when it falls due.

Now and again, I’m asked how the Revenue would know that the property has been sold. Not that I’m suggesting for a minute that I have any clients who would wish to hide it! Well, in the same way that the landlord registration system provides a database that HMRC can access to check properties being rented, SDLT provides another resource that shows when a property has been sold. As mentioned within that topic earlier, not every transaction is recorded, but any sale where money changes hands is. I don’t believe it happens at the moment, but I do believe that, in time, the information held by the SDLT section will eventually transmit through to the individual’s own tax record and again, if HMRC believe there has been any attempt to hide or evade tax, they will invoke the penalty procedure and pursue the taxpayer for the arrears of tax plus interest and probably rather punitive penalties.

Guidance

Believe it or not, that’s quite a brief summary of what is really a huge subject. There are lots of tax implications in buying or renting or selling property. I’ve mentioned already that HMRC publish useful guidance on all of the topics I’ve covered, and despite the generally poor opinion of the Revenue these days, I really do consider most of the online guidance to be good, useful, informative, and relatively easy to read. It’s not always easy to find what you are looking for, but their own manuals are a good first stop. They are sometimes written in the style of “tax for dummies”, but that is not necessarily a bad thing, and much preferable to reading the underlying legislation. Bear in mind, however, that they are not “the law”, but rather HMRC’s take on the law, so don’t assume that absolutely everything in there is gospel.

Lesley Rance is a tax adviser with Miller Hendry, solicitors, Perth

 

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