CAPITAL GAINS TAX

1 HORACE
(a) Property income– 2019/20
Property 1 3 4 Total
£ £ £ £
Income 1,450 (Note 1) 28,225 (Note 2) 2,750 (Note 3) 32,425
Less: Expenses (0) (1,650) (4,400) (6,050)
––––– –––––– ––––– ––––––
Net rental 1,450 26,575 (1,650) 26,375
––––– –––––– ––––– ––––––
Horace’s property income for the tax year 2019/20 is £26,375.
Notes:
1 Property 1 – income
As Horace is renting part of his main residence on a furnished basis ‘rent a room’
relief is available. Total exemption of this income will not, however, be possible
because his gross rents from this source exceed the limit of £7,500.
Horace will therefore have the option of either:
(i) Claiming rent-a-room relief and being taxed on the excess rents over £7,500
i.e. £1,450 (£8,950 – £7,500); or
(ii) Being taxed on this rental income in the ‘normal’ way (i.e. rents less allowable
expenses) as follows:
£
Rents 8,950
Less: Expenses (790)
Less: Interest (2/6 × £4,400 × 25%) (367)
–––––
7,793
–––––
Horace should, therefore, make the necessary election for ‘rent a room relief’ by 31
January 2022 (i.e. 12 months from the 31 January following the end of the relevant
tax year).
It should be noted that the nomination of property 2 as his main residence for PPR
purposes should not prevent property 1 being treated as his main residence for rent
a room relief purposes. This is because the CGT nomination is specifically stated to be
for PPR purposes only.
Using the 'normal rules', the deduction of the finance cost is restricted to 25% of the amount
incurred for the tax year 2019/20.
Horace would obtain basic rate tax relief of £220 (2/6 × £4,400 × 75% × 20%) for the remaining
75% by way of a deduction in his income tax computation.
 2 Property 3 – income
£
£9,900 × 3/12 2,475
£9,900 ×6/12 4,950
Premium (see below) 20,800
––––––
28,225
––––––

Premium assessed as property income (11 year lease):

£26,000 ×(51 – 11)/50 £20,800
–––––––

The alternative method of calculating the element of the premium which is taxable as property
income is:
£
Premium 26,000
Less: 2% × £26,000 × (11 – 1) (5,200)
––––––
Assessable premium 20,800
––––––
Either method is perfectly acceptable in the examination.

3 Property 4 – income
Rent from 6 October2019 = (£5,500 × 6/12) = £2,750
(b) Capital gain on disposal of the garden – Property 2
£
Sale proceeds (June 2019) 19,800
Less: Deemed cost of part disposed of:
£19,800
£ 52,000 × (6,324)
£19,800 + £143,000
–––––––
Chargeable gain 13,476
Less:Annual exempt amount (12,000)
–––––––
Taxable gain 1,476
–––––––
 However, this disposal will qualify as a ‘small land disposal’ as the proceeds are not more
than 20% of property value before disposal and, are less than £20,000.
Horace may therefore elect to deduct the sale proceeds from the £52,000 original cost to
give a base cost for future disposal purposes of £32,200 (£52,000 – £19,800).
Whether Horace wishes to make the election will depend on his future disposal plans and
whether he is likely to use the AEA against any other gains in the tax year 2019/20.
The election will delay CGT on the taxable gain of £1,476 giving a CGT deferralof £266 (18%
× £1,476), assuming that the gain falls into Horace’s basic rate tax band. The rate of 18%
applies as the gain relates to residential property.
(c) (i) Property 2
Principalprivate residence relief (PPR)
An individual is entitled to PPR relief in respect of only one residence.
It is important therefore that Horace makes an election to nominate which of his two
residences will be treated as his main residence for the purposes of this relief. Such
an election needs to be made within two years of the acquisition of the second
property (i.e. in Horace’s case by 31 January 2021).
The two-year period runs from the acquisition of the property and not from the first
date that the second property started being used as a residence.
In the absence of such an election HMRC will decide for Horace which property is to
be treated as his main residence. There is a danger that they will select property 1
because Horace seems to live in this property for more time than property 2. This
could be detrimental to Horace as his current plan is to retain property 1 and
dispose, either partially or entirely, of property 2.
If a nomination for property 2 is made and accepted by HMRC it will run from the
time Horace started using this property as a residence (i.e. from 1 August 2019) to
the date the property is disposed or a further election/variation of original election is
made. The implication for property 1 is that this nominated period will be a
chargeable period of occupation for determining any potential future gain on a
disposal of this property. Horace will therefore have to balance this against any short
term CGT savings that he may make on a disposal of property 2.
It should further be noted that HMRC could reject the nomination of property 2 if, for
example, they considered that this property was simply acquired for the purposes of
resale or is being used as temporary accommodation.
Future Disposals
With regard to the future proposed disposal(s) Horace will need to carefully consider
the order in which he sells any further portions of this property. The following
possibilities appear to exist.
1 Sells the house and retains a portion of the garden for future sale
Whilst it is likely that the sale of the house itself would qualify for the PPR
exemption (subject to any restrictions for non-occupation as main residence),
case law has determined that the subsequent sale of any residual land would
not qualify for PPR relief. This is because at this point the land no longer forms
part of a main residence. A future capital gain is therefore likely to arise.
 There is the further issue that if the house is sold by 31 July2020 (i.e.  within 18
months of acquisition) there will be no restriction of the PPR exemption. This is
because, providing there has been some actual occupation (which there has),
the last 18 months of ownership of the property will always be taken as
deemed occupation (if not already actual occupation) and therefore exempted.
This may well, therefore, entirely cover both the gain on the disposal of the
house and the earlier part disposal referred to above.
2 Sells a portion of the garden and retains the house for future sale.
In this case the PPR exemption is likely to apply to the disposal of part of the
garden (being less than 0.5 hectares) and also any eventual disposal of the
house itself (again subject to any restrictions for non-occupation as main
residence). If Horace has any choice this is therefore likely to be the preferred
sequence.
(ii) Property 4
The future sale of this property will give rise to a chargeable gain calculated as the
difference between the proceeds of £71,500 and cost of £38,500.
Horace’s annual exempt amount for the year of disposal may be available to reduce
the chargeable gain.
Any remaining gain will be subject to capital gains tax at 10% or 20%, depending on
the level of Horace’s taxable income at that time. The residential property rates of
18% and 28% will not apply as this is a commercial property.
There are no reliefs available against this gain.
2 ROSALIND

This property question covers two key topics; the availability of PPR relief for capital gains tax
purposes and the income tax treatment of property income. Both topics are tested at the TX level
but generally in a less complex way than is seen here. It is important that you refresh your TX
knowledge but also pick up the more complex question styles seen at ATX by practicing plenty of
ATX questions covering TX topics.
(a) Principal private residence relief (PPR relief)
The disposal of a property that has been occupied as a main residence throughout the
period of ownership is exempt from CGT under the PPRrelief provisions. If the property has
not been used as a main residence throughout the period of ownership a capital gain is
calculated in the ‘normal way’.
Any exempt portion is then calculated using the formula below:
Exempt gain = Total gain × (Period of occupation/Total period of ownership)
It is important to note, that in certain circumstances some periods of actual absence from
the property are counted as periods of occupation.
These circumstances are as follows:
(a) Providing there has been a period of actual occupation as a main residence, the last
18 months of ownership is always exempt.
(b) Providing there has been both a period of occupation as a main residence before and
after the absence period:
(i) Any absence period when the individual was employed overseas.
(ii) Any absence period (or periods) that together do not exceed four years,
throughout which the individual was working elsewhere in the UK in
circumstances where the location of the employment was too far from the
property to live in it.
(iii) Any absence period (or periods) for any reason that together do not exceed
three years.

(b) Sale of principal private residence

(i) If Rosalind returns to occupy the house in Wales as her main residence prior to sale
the CGT implications will be as follows:
2019/20 – Gain on the sale of house with reoccupation
Original house Extension
£ £
Gross sale proceeds 80,000 20,000
Less: Disposal costs (80:20) (3,200) (800)
––––––– –––––––
Net sale proceeds 76,800 19,200
Less: Cost (W1) (122,000) (15,000)
––––––– –––––––
(Loss)/Gain before reliefs (45,200) 4,200
Less: PPR exemption (W2) 45,200 –
––––––– –––––––
 Chargeable gain/allowable loss 0 4,200
Less:Annual exempt amount – (12,000)
––––––– –––––––
Taxable gain 0 0
––––––– –––––––

2020/21 – Sale of shares

Following the sale of her shares, after taking into account her annual exempt amount
of £12,000, Rosalind will have a CGT liability of £2,260 ((£23,300 – £12,000) × 20%)
for this tax year.
(ii) If Rosalind sells the house in Wales without returning to occupy as main residence the CGT
implications will be as follows:
2019/20 – Gain on the sale of house without reoccupation
As Rosalind will no longer return to occupy the house in Wales, the 39 month period
1 July 2015 to 30 September 2018 will no longer be exempt.
As a consequence, the capital gains calculation is now as follows:
Original house Extension
non-business asset business asset
£ £
(Loss)/gain before reliefs
– as before (45,200) 4,200
Less: PPR exemption (W2) 34,516 –
––––––– –––––––
(Loss)/gain after PPR (10,684) 4,200
Less: Loss offset in 2019/20 4,200 (4,200)
–––––––
Allowable loss carried forward (6,484)
––––––– –––––––
Chargeable gain 0
–––––––
 2020/21 – Sale of shares
Following the sale of her shares, after taking into account her annual exempt amount
of £12,000 and the capital loss of £6,484 brought forward from 2019/20,Rosalind will
have a CGT liability of only £963((£23,300 – £12,000 – £6,484) × 20%).
This will give an overall CGT saving under this alternative of £1,297(£2,260 – £963).
Conclusion
It would therefore appear advisable for Rosalind not to return to live in her house in
Wales prior to its sale.
PPR relief operates by preventing a gain from being a chargeable gain where the owner has
occupied the property for all or some of their period of ownership. If PPR would apply to fully or
partly relieve a gain on the sale of a property it will also apply to fully or partly restricta loss on
that property.

Therefore, in scenario (i) the loss arising on the original house is fully disallowed because a
chargeable gain arising would have been fully exempt under PPR relief. In scenario (ii) the loss
arising on the original house is restricted by the amount of PPR relief that would have been
available if a chargeable gain had been made on the disposal.

Workings
(W1) Cost of house
The disposal of part of the property in June 2009is a part disposal for CGT
purposes. As a result, the A/(A+B) formula needs to be used to establish the
remaining base cost for future disposal purposes.
This is calculated as follows:
£
Original cost 180,000
Incidental acquisition costs 3,000
–––––––
183,000
Allocated to earlier disposal
£70,000/(£70,000 + £140,000) × £183,000 (61,000)
–––––––
Residual base cost 122,000
–––––––
 (W2) Principal private residence exemption
If Rosalind returns to occupy the Welsh house as her main residence, as
demonstrated below, her entire period of ownership will be exempt for CGT
purposes.
Total Exempt Chargeable
(months) (months) (months)
1.7.2006 to 30.6.2009 36 36
(actual occupation)
1.7.2009 to 31.3.2013 45 45
(absence for UK work)
1.4.2013to 30.6.2015 27 27
(actual occupation)
1.7.2015to 30.9.2018 39 39
(absence for UK work–
remaining three months plus
any other reason 36 months)
1.10.2018 to 31.3.2020 18 18
(last 18 months of ownership)
–––– –––– ––––
165 165 0
–––– –––– ––––
If Rosalind does not reoccupy the house:
The period 1 July 2015 to 30September2018 is no longer exempt.
Therefore the chargeable portion is: 39/165
The PPR exempt portion is: 126/165
PPR = (126/165 × £45,200) = £34,516
(c) Income tax implications of renting a house
Assuming that Rosalind decides to remain in Manchester the principal tax implications
involved in renting out her house in Wales are as follows:
• She will be assessed on property income, at her marginal tax rates (presumably 40%),
on any net profit arising from the letting of this property. This will need to be
declared as part of her self-assessment tax return.
The assessable net profit is found by deducting from any rents received for any
particular tax year the allowable expenditure paid during the tax year. This is known
as the cash basis and will be applicable to Rosalind unless her gross rents exceed
£150,000 or she elects to use the accruals basis (rent receivable less expenses
incurred).
• Allowable expenditure includes property insurance, letting agents fees, and repairs.
Capital expenditure on plant and machinery is generally an allowable deduction, but
not for cars and assets provided for use by the tenant. Where a residential property
like this is rented furnished the cost of replacement furnishings may be deducted
when paid for.
 • Interest is also an allowable deduction however; it is restricted to 25% of the total
interest incurred for the tax year 2019/20. The remaining 75% is restricted to basic
rate tax relief as a deduction in the income tax computation. If the property is classed
as furnished holiday accommodation the restriction will not apply.

 If a loss arises, such losses can only be carried forward for offset against any future
rental profits made.
 If the letting satisfies certain conditions the property will be classified as furnished
holiday accommodation (FHA). The qualifying conditions are:
(i) the property is available for commercial letting, to the public, for not less than
210 days per tax year; and
(ii) it is actually let for at least 105 days in a tax year; and
(iii) the property must not be let for periods of long term occupation totalling in
excess of 155 days in the relevant 12 month period.
Long term occupation is a period of more than 31 consecutive days let to the same
person.
The benefits of being classed as FHA are:
(i) Profits count as earnings for personal pension purposes.
(ii) A deduction is available for all plant and machinery, including furnishings.
The property will also qualify as a qualifying asset for the purposes of capital gains tax rollover
relief and entrepreneurs’ relief. However, the question only required the income tax implications.