Recent changes in the rules of Capital Gains Tax (CGT) regarding non-residents means it would be beneficial to have your property valued. In this guest blog by Michael Wright, Director of Rita4Rent, he covers:
- The change in capital gains tax rules explained
- The methods of working out a capital gain for non-residents
- Where it could be beneficial for a landlord to obtain a valuation
Capital Gains Tax Rule Non-Residents
Prior to 5th April 2015, buy to let owners, who were non-residents, were generally exempt from having to pay capital gains tax on their buy to let property. The government decided that it would be fairer to charge non-residents capital gains tax in the same way that would be charged on a resident. How that gain is worked out is not as straight forward. UK property owners would generally (assuming the property was purchased after 1st April 1982) use the purchase price and any capital costs to come up with a “base cost” from which they can work out the gain they will be taxed on. Under the rules there are 3 acceptable methods for non-residents to work out their gain as follows:
METHOD 1 – Rebasing method
The rebasing method is where the market value is used on the 5th April 2015 to work out any gain. It should be noted that this is HMRC’s “default method.”
Janice, a non-resident bought a UK buy to let property in 1992 for £90,000. On 5th April 2015 the property is worth £200,000. In 2018 she decides to sell the property for £240,000.
Using the rebasing method the gain is worked out as £240,000 – £200,000 = £40,000. Therefore the £40,000 will be the gain charged to capital gains tax (prior to any reliefs.)
Using this method obviously means that an accurate valuation is needed at the 5th April 2015. HMRC don’t require to have a valuation now but a landlord would be well advised to take note of any features that may be relevant to determine a valuation at a later date.
However, it could be beneficial for you to have a professional valuation to avoid complications in the future when you decide to sell your buy to let property.
If HMRC were to challenge the valuation that you have put on your property they will want to see that you have demonstrated “reasonable care” in coming to the valuation. One of the first questions that they are likely to ask is “Do you have a professional, independent valuation from a qualified surveyor to back your valuation?” If HMRC deem the valuation provided to be incorrect, not only may it increase the amount of capital gains tax you owe but you may also be subject to penalties.
In this situation you could always obtain a retrospective valuation, when you come to sell the property. However, it should be noted that more research and therefore cost is required to gain a retrospective valuation.
METHOD 2 – Time Apportionment method
The alternative method would be to use a straight line time apportionment method. An example of this (and when it may be more beneficial) is as follows:
James, a non-resident, bought a UK buy to let property in April 2010 for £100,000. At 5th April 2015 the property is valued at £120,000. However, due to a massive boom in house prices in this area, he decided to sell the property on 5th April 2017 for £170,000. Under the time apportionment method, the calculation is as follows:
£170,000- £100,000 = £70,000
There are 24 Chargeable months (after 5th April 2015) / 84 total months of ownership.
The gain is therefore: £70,000 X 24/84 = £20,000
Clearly in this case using a straight line time apportionment method would be more beneficial as the rebasing method would give a gain of £50,000, again, before taking account of any reliefs.
As demonstrated, if you use this method you will not need a valuation to calculate the gain. However, a valuation would still be needed to determine which method is more tax efficient in your circumstances.
METHOD 3 – The Non Time Apportionment Method
This may seem the least appealing option as any gain will almost certainly be higher than in the other two methods. However, this option may be appealing where you have made a capital loss as this could be taken forward to set off against future capital gains. The example below demonstrates this:
In 2012, Teresa who is a non-resident, purchases a buy to let “property 2” in the UK for £200,000. She already has an existing buy to let property in the UK. Due to a fall in house prices in the area, on 5th April 2015, “property 2” is worth £185,000. In 2016, due to a cash flow problem, she urgently needs to sell “property 2” and does so at a price of £180,000. Using this method creates a capital loss of £200,000 – £180,000 = £20,000. This loss can be taken forward to use against a future gain when she comes to sell her other buy to let property in the future and is therefore the most tax efficient method.
In conclusion, while not compulsory, it could be beneficial for you to obtain a valuation now rather than in the future to avoid potentially higher costs of a retrospective valuation or potentially missing out on using the most tax efficient method. If you are a non-resident and are wondering how the new changes to capital gains tax rules could affect you then we would recommend you seek professional tax advice.
As specialist landlord tax advisors, RITA4Rent would be delighted to assist you, and should you have any questions regarding this, please do not hesitate to contact us on 0800 1 22 33 57 or via our website www.rita4rent.co.uk
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