Complex(ish) CGT Question

Scruff682

I have a complex CGT question (well, complex for me).

I have a half share in a property which I acquired in June 2013 for £85,000, and after years of wrangling with the other (half share) owner and a (so far) total of £6,750 in legal costs/expenses, I have finally managed to get it sold for £207,954 (after solicitor/fees) which makes my half £103,977.

However, it gets more complicated. My solicitor is trying to recoup the £6,750 off of the other party as it is entirely down to them that I incurred this cost (long story, don't ask). As such, he is having legal wranglings with the other solicitor and wants to only release £90,000 to me at the moment whilst he goes through the wranglings.

Other info:

• I am on £75k per annum (PAYE, no other income)
• The litigation costs ((£6,750) were spread over 2019-2022)
• I have never lived in the property, rented it or gained any income from it - the other person lived in it solely

I have a few questions:

1) If I tell my solicitor to ignore trying to recoup the costs and receive the whole £103,977 now. Is my CGT calculated simply as 28% on £103,977 - £85,000 - £12,300 - £4,750, or does the fact the litigation costs occur over a few years have an effect?

2) If I only receive £90,000 from the solicitor now, and then in 3-4 months (which is in the next tax year), I receive the remainder but was unsuccessful in getting the litigation costs back, would I have CGT calculated on allowances across two years?

3) If I only receive £90,000 from the solicitor now, and then in 3-4 months (which is in the next tax year), I receive the remainder plus the original litigation costs, would I have CGT calculated on allowances across two years? How would that work if the litigation costs had originally been taken into account for the first year?

Hope that all made sense?

Any help with this would be massively appreciated as I have been dealing with this stressful situation for many years and thought it was coming to an end - now I have this potential headache!

p00hsticks

Sorry I'm not able to answer your questions, but want to point out in case you are unaware that you only have 60 days following completion of the sale to pay any CGT due....

Jeremy535897

The first question I would ask is why does your solicitor feel the need to retain £13,977 to finance the pursuit of £6,750?

The next question is what the costs of £6,750 are for. Are they incurred to confirm your title?  They need to be within section 38 TCGA 1992: https://www.legislation.gov.uk/ukpga/1992/12/section/38 to qualify as a deduction from the capital gain. It does not matter over what period they were incurred.

Based on what you have said, there is only one disposal, and that took place in 2021/22 at the price (less selling costs) of £207,954, and your share to declare is 50% of that. You have 60 days from the date of completion to complete an online return and pay the tax due. See https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax

All you need to establish is whether the £6,750 reduces the gain. If the costs are within section 38, and you end up paying them, then you can reduce the gain, but you probably won't know that until after the time limit for filing the online return has passed. The safest route would be to exclude them from the online filing. You will have to file a self assessment tax return for 2021/22, so if you do end up paying these costs, and they qualify under section 38, you can put the correct figures on the 2021/22 self assessment tax return, which does not have to be filed until 31 January 2023, and claim a refund.

Your rate of capital gains tax will be 28%. See https://www.gov.uk/capital-gains-tax/rates

Scruff682

Jeremy535897 - Excellent first question and one that I have posed to my solicitor and am awaiting a reply.  I can't understand it either.

The costs were solicitor and court costs for obtaining an order of sale for the property. The other part owner refused to sell and refused to speak to me or my solicitor, or even turn up at court. The costs were needed solely for being able to sell the property, and wouldn't have been needed at all if the other owner had agreed sell (as was always the arrangement).  Do you think that falls within section 38?

Many thanks for your help with this 👍

Jeremy535897

I can find no specific reference to the point, but I believe the answer is yes, because the asset could not have been sold without incurring these costs, the costs are payable to a legal adviser (one of the professions mentioned in section 38), and the costs relate specifically to the particular asset sold as opposed to a class of assets in general. My conclusion remains that if you don't know whether you will bear the costs when you have to file the online return, file it without including them, but by 31 January 2023 it should have become clear, so the position can be corrected in the self assessment tax return for 2021/22.

Scruff682

Jeremy535897 - Many thanks, that makes perfect sense. 

Could I do it the other way around? As I have already paid the costs (and potentially won't get them back) could I include them in the online return, then if I get them back at a later point, pay the extra.  Or is that not possible, or more cumbersome.

I was hoping not to have to do a self-assessment as I have never met the criteria, and (please correct me if I am wrong) if no CGT were applicable for this (due to the costs), then I still wouldn't meet the criteria for self-assessment?

Scruff682

Also, thinking about it (may be completely wrong here), couldn't I include the costs in the online return as I have already paid them, and if later on in the year (which is a new tax year) I did manage to win the case to get the costs back, wouldn't they fall into the next year's tax year/allowance? Which would mean I wouldn't need to pay CGT on them as they would be below the threshold?

Or would that be deemed wrong?

[Deleted User]

In answer to the last two posts

1) If you have no chargeable gain you will not meet the criteria for self -assessment as, although you have disposed of an asset with proceeds equivalent to more than four times the annual exemption, you do not currently file a self-assessment return.

https://www.gov.uk/capital-gains-tax/work-out-need-to-pay

2) The relevant date is when the sale becomes unconditional, generally at exchange of contracts. In your case this is 2021/22.

Jeremy535897

I think it is a difficult question. You don't need to complete the online return if there is no tax to pay, so you would have to be confident of not recovering at least £6,677 of the £6,750 to justify not completing it. If you said to your solicitor that you just weren't interested in pursuing the matter, that gets rid of the online return, but potentially costs you quite a lot of money.

A problem arises if you do receive a refund of the £6,750 (or in fact a refund of over £73) and haven't filed an online return. You may face late filing penalties and interest in respect of the online return, and you would have to register for self assessment as you would also have to declare the gain on that.

But if you complete the online return assuming a refund and pay some tax, you will have to register for self assessment anyway, and the process for recovering any overpaid tax may still be suffering from the teething problems it is known for.

You said that the cost was £85,000. There must have been some costs of acquisition (legal fees, stamp duty)? Presumably there were no improvements?

[Deleted User]

IJeremy535897 said:

I think it is a difficult question. You don't need to complete the online return if there is no tax to pay, so you would have to be confident of not recovering at least £6,677 of the £6,750 to justify not completing it. If you said to your solicitor that you just weren't interested in pursuing the matter, that gets rid of the online return, but potentially costs you quite a lot of money.

A problem arises if you do receive a refund of the £6,750 (or in fact a refund of over £73) and haven't filed an online return. You may face late filing penalties and interest in respect of the online return, and you would have to register for self assessment as you would also have to declare the gain on that.

But if you complete the online return assuming a refund and pay some tax, you will have to register for self assessment anyway, and the process for recovering any overpaid tax may still be suffering from the teething problems it is known for.

You said that the cost was £85,000. There must have been some costs of acquisition (legal fees, stamp duty)? Presumably there were no improvements?

I agree with all of this but would go one step further. There does not seem to be full certainty that the £6750 refund will be recovered. Under those circumstances the completion of a tax return for one year only must be the safest option - not including the refund. The return can always be amended although, as Jeremy says, HMRC wheels do not move quickly. Of course, the decision can be postponed until, say, November at the latest when there is more certainty as to whether there is any prospect of the money being received.

Scruff682

Thanks for the advice Jeremy535897

So if I have understood correctly, it looks best to log as if I get the refunded fees, swallow the bitter pill of having to do a self assessment for this year (hopefully only this year) and pay a larger slice of CGT, then when I do the self assessment, claim a refund if I don't get the fees back.  Is that correct?

As I have to do an online return now for the sale of the house, do I have to duplicate all of that in the self assessment at the end of the year? Will they understand that it is duplicate information? And is it simple enough to show that my expenses were greater than originally logged (if I don't get my fees back)?

Sorry for all of the questions, I'm very new to this.  You've been extremely helpful btw 👍😊