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Navigating Tax Liabilities in Property Transactions: A Case Study of Nadine's Real Estate Endeavors

Property tax law

Nadine wants to sell the property that she does not live in. It is not her primary residence. When she sells this property and buys two new properties, one of which will serve as her residence and the other will be rented out. As such, there will be certain tax liabilities that will arise for Nadine. These liabilities are in relation to the sale of the old property, and purchase of the new properties. Basically, as Nadine is selling a property, she may have to pay Capital Gains Tax. As she is purchasing new properties, she will have to pay Stamp Duty Land Tax. One of the properties is being purchased for renting out, on which Nadine will have to pay Income Tax. Also, Nadine will have to declare one of the two properties purchased as her principal residence, in order to avoid Capital Gains on that in future. These liabilities are discussed in this essay.

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Capital Gains Tax

First of all, as Nadine is selling a property, there is a Capital Gains Tax (CGT), which is applicable to the sale. In the UK, CGT is applied on the realisation of capital gains, which happens at the time of disposal of the assets and the realisation of gain seen at the time of computation. The key concepts here are asset, disposal of the asset, and gain from the disposal. The rate of CGT on the capital gains accrued to individuals at present time are 10 percent and 20 percent. In case of the basic rate band, the applicable CGT is 10 percent. In case of the higher or additional rate bands, CGT is charged at 20 percent. In case of a sale of a property that is not residential property, the additional 8 percent is applicable taking the CGT liability to 28 percent.

In case of residential property, the chargeable gains rate of 28 percent is still applicable. Therefore, a sale of a property will result in a CGT if the gain amounts to 28% or more. This is what is applicable to Nadine at this point in time. The gain for capital gains tax is calculated on the basis of the original purchase price and the sale price. Here, the improvements on the property are also included to bring down the difference and the tax liability. The exemption from this tax is applicable if it is the main residence of the seller. In fact, the private residence relief is one of the principal exemptions under the CGT structure. As per this relief, the house that serves as a residence for a person is completely exempt from CGT. In other words, on the

  • Glen Loutzenhiser, Tiley’s Revenue Law (London: Bloomsbury 2016) 677.
  • Ibid.
  • Malcolm James, The UK Tax System: An introduction (Spiramus Press 2016) 54.
  • Ibid.

disposal of the residence, irrespective of the gain made by the owner, there will be no CGT attracted. The principal provisions for the same are Taxation of Chargeable Gains Act 1992 (TCGA 1992), ss.222 and 223. S.223(1) provides:

“No part of a gain to which section 222 applies shall be a chargeable gain if the dwelling-house or part of a dwelling-house has been the individual’s only or main residence throughout the period of ownership, or throughout the period of ownership except for all or any part of the last 36 months of that period.”

This provision can be applicable to Nadine because she has rented out this property in 2014 and when she sells it in 2017, the period of letting out will be 36 months or less. Since 2012, when the property was purchased by Nadine, to 2014, Nadine was in occupation of the property. She can therefore, claim for an exemption under TCGA 1992, s.222 by showing that she occupied the residence since it was purchased and the period for which it was let out does not exceed 36 months.

Stamp Duty Land Tax

As Nadine is also purchasing two properties, Stamp Duty Land Tax is also to be paid. paid when an individual buys a house, for more than £125,000. Stamp Duty Land Tax is payable under the Finance Act 2003 (FA 2003). The Stamp Duty Land Tax is payable on transactions involving land, which are defined as “any acquisition of a chargeable interest.” A chargeable interest is defined as “an estate, interest, right or power, in or over land in the United Kingdom.” Accordingly, a freehold estate as well as a rent charge comes within the purview of a chargeable interest.

The Stamp Duty Land Tax is payable on the chargeable consideration, which is the one agreed amount for the purchase of an interest in a property. If the amount paid includes a Value Added Tax, then the Stamp Duty Land Tax is payable on the Valued Added Tax inclusive price.

The Stamp Duty Land Tax is payable at the time of the completion of the transaction. Therefore, Nadine’s liability to pay this tax does not arise when she enters into the contract, even if she pays some consideration at that point in time. The liability arises only when she completes the transaction or substantially performs the contract, which means the time when she pays the substantial agreed amount.

  • FA 2003, s.43.
  • FA 2003, s.48 (1) (a).
  • Tony Johnson, Chris Hart, The Stamp Duty Land Tax Handbook (Oxon: Taylor and Francis 2014) 2.
  • Ibid, 40.
  • Ibid, 40.

As Nadine is purchasing two flats, one for the purpose of residence and the other for renting out, there is a possibility of a linked transaction in the purchase of two flats. It is possible that she plans to but the two flats from the same developer, in which case this will be a linked transaction. The FA 2003, s.108 defines linked transactions as those “for the purposes of this Part if they form part of a single scheme, arrangement or series of transactions between the same vendor and purchaser or, in either case, persons connected with them.” In case of a linked transaction, the consideration is taken to be the aggregate total of all the transactions. Therefore, if Nadine is buying two flats from the same developer, then the different consideration values of the two transactions will be added and treated as one for the purpose of computation of the Stamp Duty Land Tax. This mechanism ensures that the purchaser does not use multiple transactions in order to avoid the Stamp Duty Land Tax which is applicable on a transaction of a value over than £125,000. However, for there to be a linked transaction, the HMRC now takes a stand that the purchase of two properties must have led to some variation, or a discount that is related to the fact that the purchaser is buying the two properties together. If there is no such variation, then the link appears to be broken and s. 108 is not attracted.

Stamp Duty Land Tax is payable within 30 days of the effective date of the transaction, for which the purchaser has to deliver a land transaction completion return form (Form SLDT1) with the relevant particulars duly filled in. Nadine is required to do it within 30 days of the effective date of the transaction, which is completion date, unless Nadine pays the substantial amount of agreed consideration before such date.

Income Tax

Income Tax on rent is payable by Nadine if she buys a property to let as she is intending to. Rent is treated as an income. Under the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), Part 3, such rent is taxed. Rent as such is not defined under the law, but generally speaking, any payment due from the tenant to the landlord by reason of tenure, is treated as rent. If the rent received from the property

  • Ibid, 128.
  • Ibid, 45.
  • Ibid.
  • Malcolm James, The UK Tax System: An introduction (Spiramus Press 2016) 76.
  • Glen Loutzenhiser, Tiley’s Revenue Law (London: Bloomsbury 2016) 561.

is more than £ 2500, then the landlord has to pay income tax on the self-assessment tax return.

ITTOIA 2005, Part 3 deals with property income. Section 266 defines generating income from land as “exploiting an estate, interest or right in or over land as a source of rents or other receipts” and rent includes “payments by a tenant for work to maintain or repair leased premises which the lease does not require the tenant to carry out.”

If an individual owns a property that is rented out, the net rent will be subject to the Income Tax regime, which can go up to 45%. It is noteworthy that what is taxable is the net rent and not the gross rent, therefore, the lessor can deduct various items such as management expenses, insurance premiums, repairs of the flat and its maintenance, and the costs of finding new tenants and mortgage interest, if any. Thus, Nadine is liable to pay the net rent as the income tax. However, Nadine will not be subjected to double taxation on the rented property by adding to the Capital Gains. In effect, the income from rent will be excluded from capital gains.

Nadine will be impacted by all of these taxes as she is selling one property and buying two flats, one for the purpose of residence and the other for the purpose of renting out. Her exact tax liability will be determined by the consideration amount for the sale of her property and the consideration amount for the two properties that she plans to buy. Moreover, she may even be impacted by the linked transaction rule, if her case falls within the rule.

The extent of minimising liability to taxation

In the UK, there are exemptions that are granted to property owners, both individual as well as corporate due to which it is also sometimes considered that the tax regime allows minimising of tax liability. Capital gains tax (CGT) is a tax that is charged on a profit made from sale of capital assets including land or a building, where the gain is calculated as being an amount more than what was paid for them. The CGT is structured in such a way, that there are actually categories of persons as well as assets that are exempt from the it, due to which CGT is also called as an ‘easily avoidable

  • Robert Abbey, Mark Richards, Property Law Handbook 2013-2014 (Oxon: Oxford University Press 2013) 241.
  • Robert Leech, ‘Quick Guide to Capital Gains Tax’, accessed

tax’. Here, the concept of exemptions that are allowed to individuals as well as assets from the CGT is a way of legally minimizing tax liability.

It is first a point of importance that CGT is not attracted by every sale of a chargeable asset. It is attracted only in the event of a gain from the sale and in a case where there is no gain there cannot be a CGT. The net gain that is accrued to the seller of the capital asset is computed by deducting the acquisition cost from the disposal proceeds, which will give the actual amount of capital gain. As mentioned earlier, it is not necessary that every sale of a capital asset will lead to a gain. There may be no gain to the seller, or there may even be a net loss. Therefore, CGT is charged on the net amount of chargeable gains accruing to an individual in a fiscal year after deducting any allowable capital losses. Therefore, any incidental expenses or costs of acquisition and disposal, such as advertisement costs, brokerage, etc., shall be deducted from the amount to come to the net amount. Another important point here is that CGT is not paid by all persons and across all categories of assets. CGT is basically only paid on chargeable gains by a person who is chargeable for the CGT.

The Taxation of Chargeable Gains Act 1992 (TCGA 1992), which repealed and replaced the Capital Gains Tax Act 1979, is the principal legislation under which CGT is charged. TCGA 1992 allows many exemptions to class of persons as well as assets, making many writers very critical of the existing CGT regime.

The assets which attract CGT are called ‘chargeable assets’ and the persons who can be charged CGT are chargeable persons. CGT is applicable only to these categories of assets and persons. Chargeable assets can be defined as “all forms of property, wherever it may be situated, which is not specifically designated as exempt from tax on capital gains”. The operative words that are applicable here are ‘not specifically designated as exempt from tax on capital gains’. These operative words effectively turn the focus of the tax on that which is not exempt, thereby allowing a number of areas that are exempt from taxation. In other words, it can be said that whatever is not exempt is chargeable. This is important because there are actually many assets which exempt, thereby giving property owners in the UK many opportunities to minimize their tax liability.

In the case of chargeable assets, CGT is not attracted if the case falls within the exempted measures or within specific allowance limits that are provided in the statute,

  • Smith, Williamson, CCH Capital Gains Tax and the Private Residence (Wolters Kluwer 2014).
  • Jonathan Law, A Dictionary of Business and Management (OUP 2016) 96.
  • Ibid, 110.

which do not attract CGT. First of all, there is an annual allowance for capital gains tax and this is called the ‘annual exempt amount’. As per this provision, those persons who are chargeable with chargeable assets, may actually stand to make a certain amount of gain on the property each year that is exempt from CGT. At the moment, the annual exempt amount for individuals, personal representatives and trustees for disabled people have an stands at £11,100 for the year 2016-17. Hence, this is the amount of gain on the capital, which is outside the scope of tax liability under the CGT regime.

Second, the TCGA 1992, s.297(7) allows married people or civil partners as separate individuals, thereby treating them as paying CGT on the disposal of their own assets. This principle is extended to the annual exemption amount allowed to each individual. A married couple or a civil partnership couple together is exempted to the limit of £ 22,200 (£11,100+ £11,100 for each individual). This again provides the opportunity to property owners to minimize their tax liability. However, to ensure the fairness of this system, it is provided that the annual exempt amount cannot be carried forward from one year to the other. In other words, the annual exemption amount must be utilized by the individuals in that year itself. If the amount remains unutilized in that year, the allowance is not applicable for the next year.

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There are many types of assets, from which gains can be made by the property owners, but there will be no CGT applicable to such gains. The exempt assets category includes the principal residence and leases of up to 50 years. Thus, property owners may take these provisions to their advantage for maximizing their tax advantage for property. If a property owner owns more than one property, he can declare one of these to be his principal residence and avoid the payment of tax on that property if he sells it at some point. He may replace one principal residence with the other after the sale, and still not have to pay CGT. Therefore, CGT can be perpetually saved by the property owner by selling one principal residence and buying another. A study points out that successive ‘main homes’ are used by people to avoid CGT and also there is a practice of ‘flipping’ properties. This is a criticism of the taxation regime which gives a leniency to homeowners in the UK and allow them a perpetual saving of the capital gains tax.

  • HM Revenue and Customs, ‘Guidance: Capital Gains Tax rates and annual tax-free allowances’, accessed
  • Ibid.
  • Dirk Tänzler, Konstadinos Maras, The Social Construction of Corruption in Europe (Routledge 2016).

Homeowners can also take advantage of the provisions for deferral of tax liability for chargeable assets and persons. These provisions are allowed in the TCGA 1992 itself, and these effectively allow a deferral of liability to pay CGT. Basically, there are two kinds of deferrals that are allowed under the TCGA 1992. The first is called the ‘rollover’ relief, which is the rolling over of the gain from the disposal of one asset to another by removing the gain from the sale price of the first asset and applying it to the purchase price of another. Keeping this in consideration, rollover relief applies only in those situations where one asset is disposed of and the proceeds are used to buy another asset. This can be explained with the help of a scenario. W buys a building for £400,000. Two years later, he sells this building for £500,000 and uses the money from the proceeds to buy another building. We will be able to defer the payment of the CGT by rolling over this liability to the new purchase, and continue doing it over successive multiple transactions. In this way, property owners can minimize their tax liability by using the roll over relief.

Homeowners in the UK have many areas in the taxation regime that they can utilize for the purpose of minimizing their tax liability. One author has said: “UK capital gains tax system favours homeowners with the complete exemption of their realised capital gains on qualified principal residences”, moreover, the resultant horizontal equity for alternative investors allows them to “structure their tax affairs in such a way as to take advantage of the dual annual exemptions available to married individuals with shared capital assets and legally avoid capital gains taxation.”

Bibliography

  • John Tiley, Glen Loutzenhiser, Revenue Law: Introduction to UK Tax Law; Income Tax; Capital Gains Tax; Inheritance Tax (Bloomsbury 2012).
  • Robert Leech, ‘Quick Guide to Capital Gains Tax’, accessed
  • PR Alexander, ‘Owner-Occupied Housing Taxation: An Equity Evaluation Of The Uk And Us Tax Systems’, 2012, accessed , 218.
  • Abbey R and Richards M, Property Law Handbook 2013-2014 (Oxon: Oxford University Press 2013)
  • Alexander PR, ‘Owner-Occupied Housing Taxation: An Equity Evaluation Of The Uk And Us Tax Systems’, 2012, accessed
  • James M, The UK Tax System: An introduction (Spiramus Press 2016)
  • Johnson T and Hart C, The Stamp Duty Land Tax Handbook (Oxon: Taylor and Francis 2014)
  • Law J, A Dictionary of Business and Management (OUP 2016)
  • Leech R, ‘Quick Guide to Capital Gains Tax’, accessed
  • Loutzenhiser G, Tiley’s Revenue Law (London: Bloomsbury 2016)
  • Smith, Williamson, CCH Capital Gains Tax and the Private Residence (Wolters Kluwer 2014).
  • Tänzler D and Maras K, The Social Construction of Corruption in Europe (Routledge 2016).
  • Tiley J and Loutzenhiser G, Revenue Law: Introduction to UK Tax Law; Income Tax; Capital Gains Tax; Inheritance Tax (Bloomsbury 2012).

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