Below we highlight some of the potential implications for property owners and property businesses. These may not have immediate impact, but could significantly increase the amount of tax due in future.
Non-UK residents and the disposal of UK main residence
Non-UK residents are liable to UK capital gains tax on the disposal of UK residential properties. If the disposal is of their main residence, gains in relation to any tax years for which they occupied the property (or other UK homes) for 90 days or more may benefit from principal private residence relief.
Given the extent of worldwide restrictions on travel, the owner may fail to meet the 90 day requirement for 2020/21, which results in a proportion of the gains arising on disposal of the property not attracting the relief.
Furnished holiday lets
Furnished holiday lets attract some tax advantages over other buy-to-let properties including, as the activity is deemed to be a trade rather than investment activity, the ability to claim Entrepreneurs’ Relief (“ER”) on disposal so that the gains arising are taxed at the reduced rate of 10% rather than residential property rate of 28%. A property has the status of a furnished holiday let for a tax year, so in order to meet the 2-year requirement for ER, it may be necessary to qualify for the status in 3 separate tax years.
A property in the EEA can qualify as a furnished holiday let, so the impact of the virus in other countries may impact on the treatment.
To qualify as a furnished holiday let the property must meet several conditions in respect of the number of days that the property is available to let and the number of days it is in fact let in a tax year.
The legislation does however provide certain “grace periods” where a property fails to qualify if it is not actually occupied for the requisite 105 days in a tax year due to unforeseen circumstances but there is a genuine intention to let it. A taxpayer needs to elect for this treatment and would need to be aware of this before the deadline of 31st January 2022, in order to preserve their entitlement to relief for the tax year 2020/21.
It might be the case that by delaying a sale past 5th April in a future tax year, or by offering the accommodation cheaply for some nights in a future tax year, the 18% tax saving can still be achieved, but an owner would need to be fully informed of the consequences of his choices in order to navigate this.
Divorce, separation and capital gains tax on the family home
The COVID-19 crisis is anticipated to result in a surge in divorce applications, but delays caused by the virus could result in a tax liability where an interest in the family home is transferred to a spouse.
If a couple separate in April 2020, then unless they either complete the transfer before 5th April 2021, the end of the tax year of separation, or wait until after the divorce is finalized, such a transfer is not a no-gain no-loss transfer, but takes place at market value even if no consideration is given. Thus, unless any gain is fully covered by Principal Private Residence relief, bad timing could give rise to a tax liability.
Higher rate SDLT and properties available to the public
Acquisitions of residential properties for £1.5m by a company are subject to stamp duty land tax at the 15% higher threshold rate. However, among the potential exemptions applying are where the property is acquired as part of a trade and it will be made available to the public for at least 28 days, e.g. a residential dwelling acquired for use as a wedding venue might benefit from this exemption.
Relief is clawed back if the condition is not satisfied at any time in the three years from acquisition. If such a business closed its doors because of the COVID-19 crisis and failed to satisfy the 28-day condition within the three years since its acquisition, the relief could be clawed back.
Owners of certain heritage properties benefit from conditional exemption from inheritance tax and capital gains tax, subject to undertakings given to HMRC. Typically, these undertakings include making available the property to the public for 28 days or more in a year. Unlike in the case of the higher rate threshold for SDLT, the minimum 28 days is not specified in statute but is HMRC established practice. In light of COVID-19, HMRC has recently issued guidance confirming that undertakings will not be considered breached if the properties remain closed.
De-enveloping residential properties held in corporate structures
The government have advised that house sales should not go ahead unless essential and so it will be hard to value properties and any valuation is likely to be reduced.
This may provide an opportunity for some who hold residential properties in structures which are no longer advantageous for UK taxation purposes to “de-envelope” those properties without incurring non-resident capital gains tax charges that applies to gains relating to the period from April 2015 to date.