Many traditional landed estates hold residential property, and a number of taxation changes that landowners should be aware of come into effect from 6 April 2020.
Over the past few years, a large number of landed estates have sought to divest themselves of more traditional asset classes, such as let cottages, and invest in more diversified income streams like solar. Several estates have found that where cashflow is particularly tight or weather has been unkind for farming, selling one or two cottages has provided the cash injection they required.
UK residential property disposals
Currently, where a traditional estate owned and managed by individuals or trustees sells a small let cottage, the disposal and any capital gains tax (CGT) payable need to be reported and paid to HMRC by 31 January following the end of the tax year. This means the tax may not be due for up to 21 months after the disposal.
From 6 April 2020, this all changes. If a gain is realised on disposal of a UK residential property after this date, a return and payment on account of CGT is due within 30 days of completion. The payment on account will need to be estimated reliably and so an idea of income levels of the person making the disposal may be required. However, the estimate can take into account brought forward capital losses and any annual exemption available, as well as private residence relief (PRR).
It is worth noting that these new rules also cover gifts and transfers – for example, where a residential property is gifted to a trust or where a residential property is passed down the generations by way of gift. These transfers would also trigger the same reporting and payment requirements, although holdover relief may be available to reduce any payment due.
Private residence relief (PRR)
Many estate owners will occupy a property on their estate. Although not exclusively, these tend to be homes with significant value that have been within the family ownership for several generations. Where the house stands at a gain and the owner has lived there constantly throughout ownership, the gain should be covered by PRR. However, where owners do not occupy the property in full throughout their ownership, for example they live elsewhere or work abroad for business, then any gain accruing to a period of non-occupation may be chargeable to CGT. PRR, and currently potentially lettings relief, can help reduce any chargeable capital gain arising.
Although legislation is still in draft form, and the outcome of March’s Budget remains to be seen, it is expected that from 6 April 2020, the grace period - known as the final period exemption - will be reduced from 18 months to just 9 months. Even where the house has been occupied fully by the owner up to the point it is put on the market, if the period between moving out and sale exceeds 9 months then CGT may still be payable.
Where the main home was also let at some point during the owners’ occupation, then lettings relief may apply to reduce any capital gain further. From 6 April 2020, however, it is expected that this relief will only apply where the homeowner shared occupancy with the tenant. As there are no transitional rules, periods of letting before 6 April 2020 will also fall under the new regime.
For homes held within trust structures the PRR rules can be more complicated and so specialist advice is recommended.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.