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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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If I sell my uk property (my main and only residence) before

Customer Question

hello if I sell my uk property (my main and only residence) before October 2016, do I need to pay taxes in the uk?
Submitted: 12 months ago.
Category: Tax
Expert:  TonyTax replied 12 months ago.

Hi. My name is*****'m looking at your question now and will post my answer or ask for more information here in a short while.

Expert:  TonyTax replied 12 months ago.

Can you tell me what significance October 2016 has please. Are you a UK resident for tax purposes?

Customer: replied 12 months ago.
no, my residence is in germany
Expert:  TonyTax replied 12 months ago.

Thanks.

Can you tell me when you left the UK to live in Germany please.

Customer: replied 12 months ago.
2014 something like that
Expert:  TonyTax replied 12 months ago.

Thanks.

Leave this with me while I draft my answer. It will take a while as the rules have changed and there is much to consider.

Customer: replied 12 months ago.
ok please let me know if you need further info.
Expert:  TonyTax replied 12 months ago.

Had you sold your UK home by 5 April 2015, you would have had no CGT to pay on any gain you made unless you returned to the UK within 5 years.

With effect from 6 April 2015, gains made by non-UK residents on the disposal of UK residential property have been subject to UK CGT dependent on certain reliefs such as princilple private residence relief and letting relief.

Take a look here and here. As a non-UK resident, you have three choices as to how to calculate your gain for UK CGT purposes (see second link):

1 You can use the 5 April 2015 value as the cost for CGT purposes so you would only pay CGT on the increase in value since 5 April 2015.

2 You can simply time apportion the gain over the whole period of ownership and deduct that proportion of the gain related to the period before 6 April 2015.

3 You can simply use the gain for the entire period of ownership.

Main residence relief and letting relief (if the property was let) may be claimed but look here for the restrictions. As the UK property was your main home before April 2015, the last 18 months of ownership will be given as a tax free period if you sell it by 6 October 2016.

I hope this helps but let me know if you have any further questions.

Expert:  TonyTax replied 12 months ago.

I have to go out for about 30 minutes but will be back to answer any follow up questions you may have.

Customer: replied 12 months ago.
Understood. I should sell it for 405k, spent a total of 15k for buying and selling it and it's value on April 2015 was probably 375k. So the CGT should not be too much, if I sell it before October 2016. What about double taxation (double treaty) how does that work? Can you please explain? Do I need to pay taxes also in Germany? And if this is the case, how much? Thanks
Expert:  TonyTax replied 12 months ago.

I'm not an expert on the German tax system and you have chosen to live in a country with a tax system that is probably more complex than any other country's tax system.

If you look here, it says that if you are a tax resident of Germany, you will pay CGT on gains on property held for less than 10 years. Gains on property held for more than ten years would appear to be exempt. Any taxable gains are taxed at the income tax rates in Germany. There are no separate rates of tax for capital gains so any gains that are taxable are simply added to your income.

I'd advise you to seek local advice on how you will be affected. As I said, I'm not an expert on German tax and this is a UK tax site.

Customer: replied 12 months ago.
To complement my question, I found this https://www.gov.uk/tax-uk-income-live-abroad/taxed-twiceWhere it also saysDouble taxation agreements don’t apply to tax on gains from selling UK residential property.Can you explain? Not clear to me.
Cheers
Customer: replied 12 months ago.
I read that but it is not clear to me if that applies to an oversee property or to a German one or to both.
Expert:  TonyTax replied 12 months ago.

These are the German tax rates.

With regard to the link. What double taxation relief does is to split your tax liability between two countries, the one where the gain comes from and the one you live in. If you have a CGT liability in the UK, that liability will be deductible from any CGT liability you have in Germany under the terms of the double tax treaty. Your gain will be taxable in Germany if you owned the property for less than 10 years but for German tax purposes, your gain will not be worked out the way it is for UK tax purposes. I don't know whether you get any discounts off your gain in Germany for the property having been your main home and that is something you need to seek out local advice for.

Customer: replied 12 months ago.
Ok and then, taking into account your explanation, what does this mean?
"Double taxation agreements don’t apply to tax on gains from selling UK residential property.". Found in the hmrc site. Thanks
Expert:  TonyTax replied 12 months ago.

Can you give me a link to that statement please.

Customer: replied 12 months ago.
here
https://www.gov.uk/tax-uk-income-live-abroad/taxed-twiceread just above "What income you can claim for".
Thanks
Expert:  TonyTax replied 12 months ago.

I've fouind the statement you referrred to and, frankly I cannot work out what it is getting at. I could show you any number of tax treaties which specifically mention relief for CGT paid in one country (usually the country where the property is based) being offset against the CGT liability where the seller of that property lives.

Having said all that, I looked at the UK/Germany tax treaty here. Article 13 paragraph 1 says that gains made on property may be taxed in the coutry where the property is based, the UK in your case. It doesn't say they aren't taxed in Germany. However, Article 23 paragraph 1a appears to say that income and gains taxed in the UK won't be taxed in Germany. You should check what a tax adviser in Germany says about that and what is meant by paragraph 1d.

Expert:  TonyTax replied 12 months ago.

I've fouind the statement you referrred to and, frankly I cannot work out what it is getting at. I could show you any number of tax treaties which specifically mention relief for CGT paid in one country (usually the country where the property is based) being offset against the CGT liability where the seller of that property lives.

Having said all that, I looked at the UK/Germany tax treaty here. Article 13 paragraph 1 says that gains made on property may be taxed in the country where the property is based, the UK in your case. It doesn't say they aren't taxed in Germany. However, Article 23 paragraph 1a appears to say that income and gains taxed in the UK won't be taxed in Germany. You should check what a tax adviser in Germany says about that and what is meant by paragraph 1d.

Expert:  TonyTax replied 12 months ago.

Paragraph 1d appears to be saying that whilst certain items of income and gains are exempt from tax in Germany, they are added to your income to determine what tax rates are applied to your German source income. I've never read anything like that in another tax treaty. As I said previously, you should consult a tax adviser in Germany to see how you are affected, if at all.

Customer: replied 12 months ago.
I think you are right about 1d, from what I have been reading around, it should mean that the next year, when calculating the tax rate, that income (from the sale of a property) will be added to other income and thus it will change the tax rate applied to you.I already went to talk to an accountant, but he is also not sure...(or better I am not 100% sure that what he is saying is correct). He said that taxes should be paid in UK but if there are no taxes to be paid in UK (i.e. taxes are zero in UK), then Germany will applies its tax. So if I have to pay £1 tax in UK, that's it nothing is due in Germany; if I have to pay £0 in UK then in Germany I will have to pay taxes. As I said I am not 100% sure about this: it sounds weird to me.Instead what you said about point 1)a) of Article 23, appears to clear to me, except the first sentence "Unless foreign tax credit is to be allowed under sub-paragraph b)", and then this is linked to b)bb) " items of income that may be taxed in the United Kingdom according to paragraph 2 of Article 13 (Capital gains);"Could you please explain this point? How these are related to each other and if it makes a change wrt the assumption that CGT is due only in UK and not in Germany.
Expert:  TonyTax replied 12 months ago.

I think that if the gain in the UK has been dealt with under UK tax law which it will be, then it would appear not to be taxable in Germany, whether that results in a UK tax liability or not. That's what I think "effectively taxed" means but I can't be 100% sure. It's more of a phrase to be deciphered at the German end I'm afraid. I don't think it means that you have to have paid a penny in tax in the UK for the gain to be exempted from German tax. That would be unfair to some taxpayers.

Paragraph 2 of Article 13 is irrelevant as it applies to gains from shares, not property gains directly. Paragraph 1bb of Article 23 says that credit for CGT paid in the UK will be given against a tax liability in Germany on capital gains from shares taxed in the UK (paragraph 2 of Arrticle 13, not property gains directly.

Customer: replied 12 months ago.
I have contacted another accountand and she said that only the UK will tax it. So it is good news.
If I sell it before October this year, it will be tax free also in the UK according to you.If, instead I keep it, and rent it for 3-4 years, let's say at £1300 pcm, I assume I will not pay too much taxes for the rent. But what about the CGT when It will come to sell it. Will I pay 28% tax rate on the profit made substracting the value when I sell minus the value at April 2015, minus the costs for buying and selling and the cost for improvements. Is there a way to minimise the CGT in this case? Thanks
Expert:  TonyTax replied 12 months ago.

As of now, you will get a personal allowance to use against your rental income even though you don't live in the UK. That may change in the future so keep that in the back of your mind.

If you use the 5 April 2015 value of the property as the cost for CGT purposes, you ignore what went before that date in terms of how long you lived in it, how long it was let etc. However, as it has been your main home, you are given the last 18 months of ownership as a tax free period, hence a disposal by 6 October 2016 making the gain completely tax free. 6 April 2015 to 6 October 2016 is 18 months.

If you let the property for 4 years froim 6 October 2016 for example, then the gain for 4 years out of the 5.5 years from 6 April 2015 to the date of sale will be taxable but you will get letting relief which is worth up to £40,000 off the taxable gain per part owner. Take a look at HS283 for information on letting relief. The cost will be the sum of the value on 5 April 2015, the improvement costs incurred post 5 April 2015 and the selling costs. CGT on residential property gains is charged at 18% or 28% or a combination of the two rates depending on the level of your UK income in the tax year you dispose of the property, assuming you are still living outside the UK when you sell it.

There isn't much you can to reduce the CGT. Putting the property into joint names with a spouse may affect your entitlement to the last 18 months relief and letting relief on half the gain.

Expert:  TonyTax replied 12 months ago.

Letting relief may not be available unless you spend at least 90 days per tax yeaer in the UK property and elect for it it treated as your main home.

Customer: replied 12 months ago.
Letting relief seems very attractive but this rule of 90 days is not easy to meet. Where did you find this caveat? Thanks
Expert:  TonyTax replied 12 months ago.

The fact that you need to live in it for 90 days suggests that, whilst you are given the last 18 months as a tax free period because you lived in the property before 6 April 2015, reading between the lines of the notes here suggests to me that main residence relief and letting relief which is dependent on main residence relief applying won't be available post 5 April 2015 for disposals after 6 October 2016.

Customer: replied 12 months ago.
are you suggesting that selling after 6 October 2016 is becoming less and less attractive? Now I am getting very confused. I could sell my property before that actually, taking into account where I am in the process. Thanks.
Expert:  TonyTax replied 12 months ago.

Look at the notes here, "If you sell your home on or after 6 October 2016,........".

Customer: replied 12 months ago.
When I use the calculator to understand how much I need to pay for CGT, I get 3 different values. 2 of them are zero. And the other is around 5k. Why? And what does this mean? Can I use the lowest value? Is it worth to get the property valued at April 2015? I guess the highest the value, the better. Thanks
Expert:  TonyTax replied 12 months ago.

As I said at the start, as a non-UK resident you have three choices as to how to work out your gain. You would not get those choices if you were UK resident. Your would calculate the gain based on the history of the property's occupation by you and by tenants over the entire period of ownership, what it cost and what it sold for.

For anybody who has owned a UK residential property for a significant number of years, the April 2015 value will probably be the best way to calculate the gain given how UK residential property prices have risen. You might choose one of the other methods if you have a loss or you haven't owned the property that long such that the history of the occupation of the property may give rose to a lower gain than if the April 2015 value was used.

You are free to use whichever method you like. You will need a valuation of the property at 5 April 2015 if you want to use that as your cost.

Customer: replied 12 months ago.
Sorry another question:
wrt to this point: "you, your spouse or civil partner must have spent at least 90 days in your UK home during that tax year"
1) how this can be demonstrated?
2) in the UK means not necessarily in my apartment correct? if it is rented out for instance, I see it difficult
Expert:  TonyTax replied 12 months ago.

1 You have to keep a record of visits to the UK. Flight tickets and photographic evidence may help.

2 That's exactly what it means. You cannot claim that a flat is your main home if you don't spend time there. Most people would not be letting a UK home that want to be seen as their main home.

Customer: replied 12 months ago.
understood so UK it does not mean my apartment.Then I do not understand why the PRR is linked to the letting relief, as you have explained.is it because of this:"Claim Letting ReliefYou can get the lowest of the following:- the same amount you got in Private Residence Relief
- £40,000
- the same amount as the chargeable gain you made from letting your homeLetting Relief doesn’t cover any proportion of the chargeable gain you make while your home is empty. "https://www.gov.uk/tax-sell-home/let-out-part-of-homeand if the first point is 0, I will get 0?
Can you explain?If it is my main residence I cannot let it, as you say. I am confused about this explanation that you gave:
"Letting relief may not be available unless you spend at least 90 days per tax yeaer in the UK property and elect for it it treated as your main home."thanks
Expert:  TonyTax replied 12 months ago.

See example 9 of HS283 here. This applies to a residential property sold by a UK resident. Letting relief is the lesser of:

1 £40,000,

2 the exempt gain which is the sum of that part of the gain covered by the owner's occupation of he property as his or her main home and the gain for a maximum of the last 18 months of ownership when the owner wasn't living there and

3 that part of the letting period gain which is not covered by the last 18 months of ownership which is given as an exempt period as part of 2 above.

If the property was only let for the last 18 months of ownership and the owner had previously lived in it for the entire period of ownership except for the last 18 months of ownership, the entire gain would be tax free and no letting relief would be due.

In your case, if you use the April 2015 value as your cost whicb it has to be said is about the most generous tax relief ever given to an individual, you ignore the previous period of ownership as if it never existed. In effect, you are treated as having bought the property on 5 April 2015. However, as the property has been your main home pre-5 April 2015, you will get the last 18 months of ownership as a tax free period if you sell it by 6 October 2016. If you don't, then to qualify for main residence relief for any tax year starting on 6 April 2015 you need to spend at least 90 days living in it during the tax year. If you do that, you get full main residence relief for the tax year and letting relief is not required.

If you based your calculation on one of the other options, then main residence relief and letting relief would play a part assuming the property was let.

Customer: replied 12 months ago.
My question was, can I rented for 4 years and then sell it as UK non resident and get 40k letting relief? This would offset the CGT, I assume. Thanks
Customer: replied 12 months ago.
Sorry I think you have already answered. It is exactly example 9. On the remaining 28k chargeable gain, is it possible to deduct the 11k that are tax free? Or the final charge would x per cent of 28 K?
Expert:  TonyTax replied 12 months ago.

No, you couldn't get letting relief, unless you didn't use the April 2015 value as your cost.

Letting relief is dependent on the property having been your main home. For an individual who uses the April 2015 value as their cost for CGT purposes, to qualify for main residence relief for any tax year after 2014/15, you have to spend at least 90 days in the property during that tax year and if you do, you get main residence relief for that year in full and so you don't need letting relief for the other 275 days. Letting relief only covers the periods for which you don't qualify for main residence relief. You can't have two reliefs covering one period of time.

You do get the annual CGT exemption of £11,100.

Customer: replied 12 months ago.
if my sister would go living there without paying me rent and then I spend 90 days in the property, will I get full PRR?
what about if the property is empty except on these 90 days?
Expert:  TonyTax replied 12 months ago.

Clearly, HMRC know that non-UK residents cannot normally spend more than 90 says in the UK in a tax year so as to maintain their non-UK resident status so if a property is vacant or occupied by a relative, I cannot see that making a difference.

TonyTax and other Tax Specialists are ready to help you
Customer: replied 12 months ago.
ok so to recap
1) if I sell before 6 October 2016, CGT will be zero, no tax for me
2) if I sell after 6 October 2016, in case I rent it I cannot use the property value as per April 2015, and example 9 that you have referenced is the one that will be my case
3) if I sell after 6 October 2016, it will be not easy for a non uk-resident to demonstrate that he spent 90 days in the property (I assume the 90 days are not meant to be consecutive)if the points above are correct, it looks to me that paying taxes on the CGT without the rule of April 2015 reference value, i.e. selling it after 6 October 2016, will "kill" the gain obtained by the price increase that I am expecting over the next 3-4 years.
I know that this rationale depends on the figures that I have, but any hint on your side?
thanks
Expert:  TonyTax replied 12 months ago.

1 Correct.

2 You can use the April 2015 value but if you don't live in it for at least 90 days per tax year, the the gain made since April 2015 will be taxable for any tax year during which you don't spend 90 days in the property.

3 I don't see why it shouldn't be easy. You just keep a record of where you stayed. HMRC don't expect you to take a photograph of yourself in the flat every day, though that would be about as good as proof can get. Thr days don't have to be consecutive.

CGT cannot be more than 28%. You keep 72% of any gain post 5 April 2015, 82% if you have little UK income. I'd take that.

Customer: replied 12 months ago.
just to be sure that I am not missing your rationale, I have listed below an example of calculation if I sell in 3 years from now.
Is it roughly right?a) house sale price in 3 years from now £500,779.26
b) value at April 2015 £385,000.00
c) capital gain £115,779.26 (i.e. a-b)
d) tax rate 18%
e) net £94,938.99f) rent per year £15,600.00
g) general expenditure per year (accountant, etc.) £1,000.00
h) current personal allowance per year £11,100.00
i) mortgage per year £10,680.00
l) net per year £4,220.00 (i.e. f-g-h-i)m) remaining mortgage in 3 years from now £160,000.99so in 3 years I will have (a+e+3*l-m)
£500,779.26 + £94,938.99 + 3*£4,220.00 - £160,000.99 = £448,378.25
Expert:  TonyTax replied 11 months ago.

CGT on residential property gains is charged at 18% or 28% or a combination of the two rates depending on the level of your income in the tax year of disposal. Currently, a maximum of £32,000 can be taxed at 18% but that will decrease by £1 for every £1 of income in excess of the personal allowance. You have missed the annual CGT exemption which is currently £11,100.

Only mortgage interest is deductible from rent, not capital repayments.

Customer: replied 11 months ago.
Good morning,
I finally arrived to a conclusion on what I would like to do. And I hope is feasible. That's why I still need your help. I would like to sell 50pc of the house to my fiancee. Our idea will then to rent it and sell it in 3-5 years. She is resident in Germany and she has an American passport. Giving this new information, do you see any issue with this strategy? Something that we should watch out for (financially I mean)? Tax wise something will change? And also - if you know - what pragmatically will I have to do? for instance with the mortgage? Many Thanks.
Expert:  TonyTax replied 11 months ago.

I can't help with the mortgage as I'm not a financial adviser. You will need to contact them to discuss the plan, however.

If you sell half the property to your fiancee, that is a disposal for CGT purposes but if you get it done by 6 October, the gain should be tax free if you use the April 2015 value as your cost.

Given the value of the property, there will be stamp duty to pay. Take a look here for more information and use the calculator here to work that out. If your fiancee already owns a residential property anywhere in the world, she will pay a 3% stamp duty surcharge.

Customer: replied 11 months ago.
many thanks, ***** ***** contact them.
The personal allowance of 11k is available irrespectively of the residence correct?
If we buy and rent 50% - 50% how the personal allowance will be treated?
thanks
Expert:  TonyTax replied 11 months ago.

Read the notes for boxes 15 and 16 here. As your partner is a US citizen, it would appear that she won't be entitled to the personal allowance.

Customer: replied 11 months ago.
I call a lawyer and she told me that this would a transfer of equity. I assume there is a CGT to pay also on that. I case I cannot complete within 6th of October how much will I have to pay? Same figures as before? Thanks
Expert:  TonyTax replied 11 months ago.

My previous post but one did point out that a sale of part of your property to your finance will be a disposal for CGT purposes.

The CGT won't be much as you get the last 18 months of ownership as a tax free period from 6 April 2015 assuming you are using the 5 April 2015 value as your cost.

Customer: replied 11 months ago.
I thought the CGT would be on the money she pays to me. E.g. value of the property now 400k, remaining mortgage 100k, she will give me (400-100)/2 = 150. Is not this? am I missing something? where do I need to use the April 2015 value? Thanks
Expert:  TonyTax replied 11 months ago.

CGT is charged on a capital gain. A capital gain is calculated by deducting the cost of an asset from its disposal proceeds. The mortgage is irrelevant as far as CGT is concerned.

If you sell 50% of a property worth £400,000 to your fiance, your sale proceeds for CGT purposes will be £200,000. The cost will be 50% of the April 2015 value assuming you are using that as your cost. The difference between the two figures will be the gain. You will get the last 18 months of ownership as a tax free gain with the ownership period starting on 6 April 2015. The first £11,100 of what is left will be tax free and the net taxable gain will be taxed at 18%, 28% or a combination of the two rates depending on the level of your income in the tax year of disposal. So, if you completed the disposal of 50% of the property by 6 December 2016, all but 2 months of the gain for the 20 months since 5 April will be tax free. See "our View" here.