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Whether a property is residential or commercial for the purposes of Capital Gains Tax (CGT) has an impact on both the timing of the tax due on its disposal and the rate at which it is charged.

In a blog (click here) we published a while back we explained that from 6th April 2020 the payment deadlines for CGT when disposing of a UK residential property have changed significantly. Previously, when a UK resident disposed of a UK residential property which was not their PPR (for which see below), the capital gain should have been reported to HMRC on their annual UK tax return for the tax year in which the disposal took place. Any CGT liability was then due on the 31 January following the end of the tax year, along with the tax return.

However, from 6th April 2020, HMRC imposed a 30 day deadline within which they must be notified of the property sale and any CGT must be paid. In order for taxpayers to conform, HMRC launched a new online service specifically allowing taxpayers to report and pay any CGT owed.

These new rules therefore significantly accelerated both the notification of the relevant disposal to HMRC and perhaps more importantly, the date by which the tax must be paid, potentially by almost 22 months. UK residential property disposals attract a rate of tax of 28% (assuming a higher rate income taxpayer). Commercial property disposals attract a rate of tax of 20% (also assuming a higher rate income taxpayer). Note that these new notification and prompt payment rules only apply to residential property. So where is the line drawn in the case of a residential property, which is being used commercially or similarly, a commercial property which is to become residential?

Briefly before that however, to close the point on the PPR. This is broadly a home, which you own and occupy as your only or main residence, so doesn’t include holiday homes or residential lettings and you can only have one PPR at any time. It is possible to elect to shift PPR where more than one home is owned and we regularly advice on these aspects where a new family home is bought and occupied before the old one has finally been sold, for example.

Back to the question of whether property is residential or not -we have lots of experience in helping clients determine the CGT status of properties. For most property disposals it will be clear whether a property is a residential property but it is not always as straightforward as it sounds. The basic HMRC definition of a residential property is one which is used as a “dwelling” or is “suitable for use as a dwelling”.

For example, let’s imagine that a property is in a residential area and was built as a house. Assume that the building has retained a typical house “layout”, with facilities such as a kitchen, bathrooms and rooms which could easily be converted into living rooms and bedrooms. You might think this was clearly residential as it sounds suitable to be used as a dwelling. But other factors such as paying business rates or having a license for business use might point in another direction. How the property has been used historically could also be relevant. It will always come down to a case-by-case analysis.

Another interesting example showing that these types of questions are not always straightforward as they seem, is whether a property which is derelict is a residential property or not for these purposes. How derelict does it have to be to be unsuitable for use as a dwelling? This is a point which has been the subject of many legal cases.

So, if you are a UK resident considering selling a UK residential property that is not your PPR or a non-UK resident contemplating disposing of a UK residential or commercial property, whether owned directly or indirectly and you would like assistance with the calculation of the CGT due, the completion of your CGT report and advice regarding the amounts payable to HMRC or indeed, the fundamental question of whether the 30 day deadline applies at all, then please do contact us to get in touch with one of our property tax specialists.

TAP is a young and vibrant specialist tax firm, which brings together a wealth of wide-ranging experience and expertise in all areas of UK and US tax advice and compliance.