Main Residence Exemption and Period of Occupation
The First Tier Tribunal reached what may be seen as a surprising decision in Gerald Lee & Another v HMRC [2022] UKFTT 175 (TC). The key point at stake was whether CGT main residence exemption should be available by reference to the period of occupation as a proportion of the time for which the land was owned, or alternatively the time for which the dwelling had existed. Previously the generally held view was that the former was correct; this view was supported by the existence of extra statutory concession ESC D49 (now legislated in section 223ZA TCGA 1992, from 6 April 2020), which provides for a period of up to 2 years of non-occupation to be ignored.
The tribunal, however, decided that the latter approach is correct; exemption was available by reference to the period of occupation as a proportion of the time for which the dwelling existed. Significantly, Mr and Mrs Lee had demolished the house standing on the land when they bought it in October 2010. The new house was not complete until March 2013; that is, beyond the two-year period envisaged by ESC D49. Nevertheless, full exemption was given. This was on the basis that the house had been occupied for all but four days of its existence as a dwelling house, and the total length occupation was less than 18 months.
HMRC may decide to appeal, and First Tier Tribunal decisions do not set a precedent, so another court may reach a different decision, but for the moment this ruling is encouraging.
Register of Overseas Entities
The new Register of Overseas Entities - non-UK companies and other bodies with legal personality that own UK land - opened on Monday 1 August. The six-month transitional period during which initial registrations must be made will expire on 31 January 2023. From 5 September 2022, an overseas entity will not be recorded as the owner of UK land at the Land Registry until it is on the new Register of Overseas Entities.
Importantly, an overseas entity can only apply for registration on the new register if a UK regulated ‘relevant person’, typically an accountant or lawyer, verifies the information about it, its beneficial owners and, in some cases, managing officers and related trusts. The verification is intended to confirm that, on the basis of independent evidence, the information is true. This may be difficult in some cases. Care is required because civil and criminal sanctions can apply if the verification is not carried out correctly. STEP has issued a briefing note on the verification process, and technical guidance on registration and verification has been provided by the government.
UK Land Disposal Returns
HMRC have confirmed that, with one exception, CGT property returns must be filed, even if the disposal has been reported on a self-assessment return. The exception is where the self-assessment return has been filed within 60 (previously 30) days of completion, in which case the legislation gives a specific exemption.
The requirement to file returns for UK residential property disposals was introduced from 6 April 2020. Non-residents are required to report disposals of both residential and commercial property, and indirect disposals, for example shares in a property rich company, even if no gain arises.
HMRC had previously advised that the CGT return should be filed before the self-assessment return. It is understood that for many taxpayers, given filing deadlines and difficulties with the CGT return, only the self-assessment return has been filed. In this case, the CGT return can no longer be filed online, and must be submitted on paper. HMRC will charge interest and penalties, but the professional bodies have lobbied for a lenient approach.
BPR Denied for Aparthotel
Over the last thirty years there have been numerous cases considering whether inheritance tax business property relief (BPR) is available for businesses receiving rental or similar income, including property letting on a farm, caravan sites and furnished holiday lettings. Firth and Another v Revenue and Customs Commissioners [2022] UKFTT 219 (TC) was the first time that an aparthotel - providing short-term lettings of serviced apartments - had been considered.
Sometimes the question has been whether a hybrid business, for example involving farming and property letting, is one that is mainly trading. Here there was one activity, and the tribunal had to consider whether it was trading or investment in nature. At one end of the spectrum, the operation of an hotel is accepted as a trade, but at the other end straightforward property letting is an investment activity, for which BPR is not available. The tribunal considered that the level of services provided to residents at the aparthotel was not sufficient to make the activity a trading one. The aparthotel had a staffed reception, but it was open for only limited hours, and the tribunal considered that its primary function was to maximise the return on the property investment.
These cases are fact specific, but the decision in Firth gives a flavour of the questions that will be asked, and the difficulty of establishing that there is a trading business, in these situations.
TRS Data Requests
In limited circumstances, HMRC can share information on the Trust Registration Service (TRS) in response to requests submitted from 1 September 2022. HMRC have published details of their policy for dealing with these requests.
Information requests must fall into one of two categories; ‘legitimate interest’ or ‘offshore company’. In the former category, the requester must demonstrate that they are investigating a specific instance of money-laundering or terrorist financing, and that the information on the register will further that investigation. An offshore company trust data request may be made if the trust holds a controlling interest in a non-EEA (third country) company or other legal entity. Information that HMRC can share is limited to the beneficial owners that are associated with the trust. For individuals, this includes the name, month and year of birth, country of residence, nationality and their role in the trust. For companies and other legal entities, the information will be limited to their name, office address and role in the trust.
Disclosure will be refused for certain types of trust. These include non-express taxable trusts that are registered only because of a liability to UK taxation, express trusts that are excluded from registration and are registered only because they are liable to UK taxation, and non-UK trusts with no trustees resident in the UK that are registered only because they hold UK land or property. Some exemptions from disclosure also apply for individuals, for example those under eighteen or lacking mental capacity, or where releasing information might produce a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation.
No Gain/No Loss and Main Residence Exemption for Separating Spouses
Legislation is to be introduced in Finance Bill 2022-23 to give separating spouses and civil partners up to 3 years after the year they cease to live together to make no gain/no loss transfers for CGT (currently the rules only allow a no gain/no loss transfer until the end of the tax year of separation). The no gain/no loss treatment will also apply to transfers between spouses and civil partners as part of a formal divorce agreement, and the measures will improve the main residence exemption position for interests in the former matrimonial home. The new rules will apply to disposals on or after 6 April 2023.
Late Payment and Repayment Interest Rates
The HMRC late payment rate was increased to 3.75 percent from 5 July 2022. The repayment interest rate remains at 0.5 percent.