Private residence relief

There is usually no Capital Gains Tax (CGT) to be paid when you sell your main family residence (referred to by HMRC as private residence relief) that has been used as your only or main residence. 

However, there are important points to consider that can affect your entitlement to full CGT relief. These include the following:

Business use

There are special rules for business use of a private residence. Homeowners who work from home do not suffer any restriction to the relief where business use of the home is not related to a specific area e.g., where a home office also doubles as a spare bedroom. Where part of the home is used exclusively for business purposes then part of the proceeds from the sale of the house will relate to a chargeable rather than exempt use.

Main residence

It is increasingly common for taxpayers to own more than one home, and there are issues that homeowners should be aware. An individual, married couple or civil partnership can only benefit from CGT relief on one property. It is possible to choose which property benefits from a CGT exemption but there are special rules which determine the timing and frequency of changing an election and these may need to be considered.

Letting Relief

Homeowners that lived in their home at the same time as tenants, may qualify for Letting Relief on gains they make when they sell the property. Letting Relief does not cover any proportion of the chargeable gain made while the home is empty.

Absences from the family home

If a property has been occupied at any time as an individual’s private residence, the last 9 months of ownership are disregarded for CGT purposes – even if the individual was not living in the property when it was sold. The time can be extended to 36 months under certain limited circumstances. There are also special rules for homeowners that work or live away from home.

Bed and breakfast – the same day rule

Historically, the term bed and breakfasting (sale and repurchase) of shares referred to transactions where shares were sold and then bought back the next morning. This used to have Capital Gains Tax (CGT) benefits by crystallising a gain or a loss but is no longer tax effective over such a short period. The change to the rule occurred in 1998 when new legislation introduced special share matching rules. Under these rules there are limitations including a 30-day waiting period before the shares can be repurchased again.

However, it is possible, under certain circumstances, to use a modified bed and breakfasting type of arrangement to sell an asset only to buy it back again a short time later. A gain could be created to use the annual exempt amount, or a non-resident may bed and breakfast their chargeable assets to establish a higher base cost before they enter the UK tax regime.

Proper advice should be taken before undertaking such transactions to ensure that all tax aspects have been considered. For example, for any bed and breakfast transaction to be effective, there must be a genuine transfer of beneficial ownership of the asset and the share matching rules must be met.

Apportionment and duality

When deciding whether an expense is allowed or disallowed it is important to consider that the expenditure must be incurred wholly and exclusively for the purposes of your trade or employment. 

Under the legislation any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation should be disallowed. HMRC takes a slightly more relaxed view that a strict reading of the legislation would suggest. 

One of the main points HMRC examines when considering the application of the ‘wholly and exclusively’ test relates to apportionment and duality.

In this regard, HMRC’s internal manuals state that:

When you consider the application of the ‘wholly and exclusively’ test, it is important that you distinguish between cases where:

  1. a definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation. That part or proportion should not be disallowed on the ground that the entire expense is not laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation,
  2. an expense has been incurred for a dual purpose. Such expenditure should be disallowed.

For example, when considering the running costs of a car used partly for the purposes of the trade and partly for other purposes, HMRC’s position is that the costs apportioned to the business use of the car would be deductible. 

Who can use the VAT retail schemes?

VAT retail schemes are a special set of schemes used by retail businesses to account for VAT.  The schemes are used by businesses that sell a significant amount of low value and/or small quantity items to the public with different VAT liabilities.

The use of the schemes can save businesses a significant amount of time in calculating the amount of VAT due to HMRC. In many circumstances, it would be extremely difficult for these businesses to account for VAT using standard VAT accounting. By using the VAT retail scheme, retailers can calculate VAT due to HMRC at the standard, reduced and zero rates of VAT as a proportion of sales. Usually this is done on a day-by-day basis.

There are 3 standard VAT retail schemes:

  • Point of Sale Scheme
  • Apportionment Scheme
  • Direct Calculation Scheme

There is also the option of using a bespoke scheme. The use of a bespoke scheme is obligatory for retailers with a turnover excluding VAT of £130 million or more. The decision as to which retail scheme is to be used is usually driven by a combination of looking at the scheme that provides the best result for the business in question combined with the cost of using the scheme, with the important caveat that HMRC consider that the chosen scheme is fair and reasonable.

HMRC’s guidance on the 3 standard schemes and the bespoke scheme has recently been updated to include information about changes to the treatment of vouchers.

Tax when you sell a business property

There are various methods at your disposal to reduce or delay the amount of Capital Gains Tax (CGT) when you sell a property that has been used for business purposes.

For example, Business Asset Rollover Relief allows for deferral of CGT on gains made when taxpayers sell or dispose of certain assets (including property) and uses all or part of the proceeds to buy new business assets. The relief means that the tax due on the gain of the property that has been sold is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold. There are qualifying conditions that must be met to ensure entitlement to any relief.

If the main purpose of the business concerns buying and selling property, for example a property development or property trading business, then the business is not liable to CGT when a property is sold.  Instead, properties sold under the name of a Limited company will be liable to Corporation Tax and properties sold under the name of a sole trader or partner will be liable to Income Tax. 

There are also special rules for limited companies that dispose of UK residential dwellings valued at over £500,000 and which are held in a ‘corporate envelope’ (e.g., a company). Qualifying gains made after 6 April 2019 are liable to Corporation Tax.

Pre-trading expenditure

There are special tax reliefs for pre-trading expenses that are incurred before a business starts trading. These could include expenses that are required to help a business prepare for trading such as buying stock and equipment, renting premises, taking out insurance and initial advertising expenditure. 

A deduction may be allowed where the following conditions are met: 

  • The expenditure is incurred within a period of seven years before the date the trade, profession or vocation commenced, and
  • the expenditure is not otherwise allowable as a deduction in computing the profits of the trade, profession or vocation but would have been so allowable if incurred after the trade had commenced.

To be allowable, the pre-trading expenditure must be incurred wholly and exclusively for the purposes of the relief. This means that no relief would be allowed where pre-trading expenses would not have been tax deductible if they had been incurred when the business was trading.

The business should keep accurate records relating to pre-trading expenditure to demonstrate that the expenses qualify.

Qualifying pre-trading expenditure is treated as incurred on the day on which the trade, profession or vocation is first carried on. 

Capital expenditure does not qualify for this relief but there are other special provisions for capital allowances. 

The 7-year rule

Most gifts made during a person’s lifetime are not subject to Inheritance Tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.  These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.

The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned.

The effective rates of tax on the excess over the nil rate band are:

  • 0 to 3 years before death            40%
  • 3 to 4 years before death            32%
  • 4 to 5 years before death            24%
  • 5 to 6 years before death            16%
  • 6 to 7 years before death              8%
  • 7 or more years before death        0%

These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.

We would strongly recommend that you keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made from surplus income.

What is distance selling for VAT purposes?

Distance selling is the term used to describe supplies of delivered goods from one EU Member State to a customer in another member state who is not registered for VAT. 

The recipients of most distance sales will be private individuals, but they can also include small, unregistered businesses, businesses making only exempt supplies, charities and public bodies.

Following the Brexit terms, distance selling can still occur on the movement of goods between the EU and Northern Ireland. Under the terms of the agreement there can be distance selling for VAT purposes when a business supplies and delivers goods to a customer who is not registered for VAT from:

  • an EU country to Northern Ireland
  • Northern Ireland to an EU country
  • one EU country to another EU country

The UK distance selling threshold is £70,000 per calendar year. If the value of a supplier’s distance sales into Northern Ireland is under this level, then VAT should be charged at the rate that applies in the seller's home country. If the value of the distance sales goes over the threshold the supplier must register for UK VAT and start accounting for UK VAT. They may also apply for a voluntary registration if their sales are under £70,000 in the calendar year.

The distance selling rules are intended to combat distortion of trade and unfair competition by transferring the place of supply to the Member State in which the customer receives the goods.

Cash basis for landlords

The cash basis scheme helps sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. Landlords can use the cash basis when recording income and expenditure i.e., recording the flow of money from and to the business.

The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and you can stay in the scheme until your business turnover reaches £300,000.

Unlike other taxpayers that need to opt-in to use the scheme, the legislation assumes that landlords will use the cash basis as the default method of calculation. A landlord can still elect to opt out of the scheme in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. Landlords are also required to continue using GAAP if their rental receipts are more than the £300,000 scheme threshold.

HMRC’s property income manual lists the following criteria of when the cash basis is not available to a property business. 

A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).

B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.

C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.

D: Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.

E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.