Capital Gains Tax Valuations and Apportionments

Working out how much Capital Gains Tax you need to pay on a property can be complex, especially when a property has been owned for a long time.

In the case of individual taxpayers, business partnerships, self-employed sole traders and trusts, any CGT calculation will be included in the tax return for the tax year in which the transaction requiring the tax computation took place.

The valuations used by taxpayers in their tax computations are subject to examination by valuers in the Valuation Office Agency/District Valuer (VOA) on behalf of the HMRC. It is therefore essential that any valuation used in those tax calculations has been prepared on the statutory basis having due regard to case law and in accordance with best practice.

It is of great importance, when preparing a valuation for taxation purposes, to apply the statutory rules appropriately and to have a proper understanding of the basis of market value for taxation purposes.

Valuations for tax purposes are based on the concept of a hypothetical sale for which a statutory definition is required. In some cases, it may also be necessary to undertake apportionments of value. The statutory definition and interpretation of market value for tax purposes is not exactly the same as the definition of market value in VPS 4. In particular, the existence of a special purchaser, where relevant, is a factor that is to be reflected properly if the special purchaser could be reasonably known to be in the market.

The definition of the basis of value for Capital Gains Tax (CGT) can be found in section 272, Taxation of Chargeable Gains Act 1992 and is broadly defined in the same way as for Inheritance Tax and other capital taxes, namely as: ‘the price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time.’

Over the years case law has established that, in arriving at market value in accordance with the above definition, the following assumptions must be made:

  • the sale is a hypothetical sale
  • the vendor is a hypothetical, prudent and willing party to the transaction
  • the purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser)
  • for the purposes of the hypothetical sale, the vendor would divide the property, i.e. asset to be valued into whatever natural lots would achieve the best overall price
  • all preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date
  • the property is offered for sale on the open market by whichever method of sale will achieve the best price
  • there is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers and
  • the valuation should reflect the bid of any special purchaser in the market (provided that purchaser is willing and able to purchase).

Disposals of property may also require an apportionment of the sale proceeds where part of the property is exempt, for example because part forms the taxpayers ‘principal primary residence’. In which case not only will the “principal primary residence” need to be identified, but also it’s ‘permitted area’ will need to be both identified and quantified and this requires as an assessment of what qualifies as ‘garden and grounds’ and whether it falls within the general exemption of up to half a hectare. Again, there is case law behind the various definitions and in the absence of professional advice pitfalls await the unwary.

At Carter Gearing our RICS Registered Valuer, Lloyd Smale FRICS, trained in the HMRC’s VOA/District Valuer’s office and is experienced in preparing valuations at historic dates, including 31st March 1982 valuations, and in the undertaking apportionments on the required ‘just and reasonable’ basis, as well as undertaking negotiations with the District Valuer.

For advice and assistance contact Lloyd on 01363 773757, or email: lloyd@cartergeering.com