Successive years and successive taxes have looked to differentiate between the tax treatment of residential and non-residential property. Unfortunately, what is the definition of “residential” is not the same across all of the taxes and this can have unexpected results. In addition, it may not always be obvious from looking at the current state of the land, whether it is “residential” for tax purposes. In this first of a series of articles, we start by looking at residential in the context of capital gains tax (‘CGT’).
Since 6 April 2016 onwards there are now four different CGT rates for individuals and the rate applied will depend on the type of asset being disposed. Residential property disposals for UK tax resident individuals are now subject to CGT at either 18% or 28% depending on the available tax rate bands.
Sounds simple enough to decide whether a property is residential or not, however careful review of the schedules is necessary as noted above, it may not be as clear as you think. The definition of residential property for the purposes of TCGA para 2 is taken from the Non-Resident CGT A disposal of a residential property can apply if;
- The land has at any time in the relevant ownership period consisted of or included a dwelling, or
- The interest in UK land subsists for the benefit of land that has at any time in the relevant ownership period consisted of or included a dwelling, or
- The interest in UK land subsists under a contract for an off plan purchase (a contract for acquisition of land that at some point shall involve a dwelling).
The above demonstrates how broad the definition of residential properties can be.
A dwelling for the above purposes includes buildings that at any time, when it is used or suitable for use as a dwelling or it is in the process of being constructed or adapted for such use. Land follows in a similar manner to dwelling. The exception to this is where the building is used as:
- Residential accommodation for school pupils
- Residential accommodation for members of the armed forces
- A home or other institution providing residential accommodation for children
- A home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental disorder;
- A hospital or hospice
- A prison or similar establishment
- A hotel or inn or similar establishment
Consider below two examples that help to demonstrate how wide this definition can be.
The use of the same property changes prior to sale?
A building that had been acquired was previously being used as a nursing home. In the first year of acquisition the property was left vacant. Thereafter, the property was let as a residential care home for students before becoming vacant 3 years before the sale. In the final 3 years of ownership, planning permission had been obtained to convert the accommodation into residential dwellings.
During the ownership period, the building consisted of or included a dwelling or the land which subsisted for the benefit of land that at any time during period of ownership consisted of or included a dwelling and therefore potentially falls within the residential capital gains tax. However whilst it “is used” as a nursing home, it will fall within the exemption. Accordingly,
any gain from the future sale of the land/ building will need to be apportioned on a just and reasonable basis. Interestingly, the nursing home had been sold whilst still being used as a nursing home, then other than the first year when it was vacant all of the gain would have been at the standard rates of Capital gains tax, even though the property had planning permission to be converted into flats.
The property is demolished before sale so the taxpayer is selling bare land?
A taxpayer proposes to demolish or partially demolish an existing residential property so it is unhabitable before selling the land as they think that this will increase the likelihood of a sale to a developer and given that they are selling bare land, they believe that they will only pay the standard rate of capital gains tax.
Where a dwelling is demolished completely to the ground level or demolished to ground level except for a single façade, the retention of which is a condition or requirement of planning permission or development consent, then the dwelling would be treated as ceasing to exist on completion of the works (TCGA 1992 Schedule B1 paragraph 7). However, until completion of these works, the land would still be treated as residential. Any change in nature of the land would require the gain to be time apportioned to split between residential and non-residential.
Where demolition works commences but has not completed by the time of the disposal, it is also necessary to consider if paragraph 8 applies as it may result in the land interest being treated as non-residential.
Paragraph 8 applies where a dwelling has undergone complete or partial demolition or any other works and as a result of the works has at, or, at any time before the completion of the disposal, either ceased to exist or become unsuitable for use as a dwelling. As a result of the works it has become suitable for use otherwise than as a dwelling (e.g. commercial), and planning permission or development consent required for the work or for any change of use has been granted and the works have been carried out in accordance of those permissions. Than the building would be taken to be unsuitable for use as a dwelling whilst the works are in process and also for periods throughout which the building was, for reasons connected with the works not used as a dwelling.
It is evident from the above two examples hat establishing whether land/ building falls under residential is complex and that a thorough understanding on the history of how it has been used throughout the period of ownership is needed to assess the tax.
For further assistance on your property tax queries, please contact either Caroline Fleet or Reshma Johar on 0845 4900 509.