Court case

Landmark court case in London clarifies when capital gains tax is applied

A London property owner who made a big profit on a flat he was unable to reside in has won a landmark appeal against paying a hefty capital gains tax bill.

The issue of exactly when capital gains tax (CGT) should be paid has been clarified in a recent court case, which set out that the bill can only be applied after property completion, regardless of exchange.

In the case, the owner of a London apartment wasn’t able to live in their property for four years as construction was delayed because of the 2008 financial crisis. In 2006, the buyer had put down a deposit and exchanged contracts for the property before construction started on it.

He was unable to live in the flat until 5 January 2010, meaning the purchase wasn’t completed until then and it was the earliest point he could legally occupy the flat. The prolonged investment led the buyer to make a sizeable profit after selling the flat two years later.

Property completion

HMRC charged the buyer capital gains tax for the profit made since 2006, claiming the profit is calculated from when a contract is made. However, since the buyer did not legally own the property between 2006 to 2010, he said he should not be charged for the gains made during that time period.

The First Tier Tribunal agreed that profit on a gain can’t be taxed until after completion, cancelling the initial capital gains tax amount, but the Upper Tax Tribunal sided with HMRC. After the court battle with HMRC, the owner’s appeal was upheld by the England and Wales Court of Appeal.

This court case decision was analysed in a recent article in Today’s Conveyancer. The case clarifies when capital gains tax is applied on a property. Since the buyer didn’t have the legal right to occupy the flat until 2010, the period of ownership could not begin until he was granted this permission.

Changes to capital gains tax

As a landlord or investor, it’s important to understand the regulations behind capital gains tax. Up to half a million landlords could even be impacted by new rules for capital gains tax, which is likely to increase costs when landlords sell their former homes.

Currently, landlords who previously lived in a property but then rented it out can claim capital gains tax relief on the property for up to 18 months after they moved out. However, starting in April 2020, this relief will only be for nine months.

This rule change means holding onto a property after moving out of it with an aim to benefit from rising property prices later is likely to be less attractive to some landlords. Tax changes are pushing many landlords and investors to change their property investment plans.

In order to take advantage of favourable tax rates, more landlords than ever are purchasing properties through limited companies. It’s best for landlords and investors to seek professional advice on ways to minimise the negative effects of new regulations, especially involving capital gains tax.

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