The Government has published a response to its consultation 'Tax Simplification for Alternative Finance'. From 30 October 2024, individuals and companies using qualifying alternative finance arrangements will no longer be subject to Capital Gains Tax (CGT), Corporation Tax (CT) or Income Tax (IT) charges, where the same charge would not apply when using conventional financing arrangements.
Background
Alternative finance arrangements are a way of raising finance that typically involves the sale, purchase and renting of assets in circumstances where conventional financing would involve lending with the payment or receipt of interest.
When using conventional finance arrangements, a person refinancing a property they ownand using it as collateral, is not making a disposal for CGT purposes.
A common method of alternative finance for property is Diminishing Shared Ownership (DSO) arrangements.
Where a person wishes to refinance using DSO arrangements, they would typically sell an interest in the property to a financial institution, who would then advance the finance required.
This transaction will represent a Disposal for CGT purposes, potentially resulting in tax being payable, unless a relief such as Private Residence Relief (PRR) for Residential property applies.
It is tax disparities such as this, between conventional and alternative refinance arrangements, that the consultation sought to address.
Responses
The consultation received 22 responses.
- Over three-quarters agreed that the consultation captured all CGT implications of entering into alternative refinancing arrangements.
- More than 80% of respondents broadly agreed with the Proposed conditions to be met to be exempt from a CGT charge when using alternative finance arrangements.
- Almost two-thirds agreed in principle to the requirement that alternative financing arrangements should be completed in a set period of time.
- All respondents agreed that the rules should be extended to home purchase plan providers.
- While three-quarters of those who responded thought that Capital allowance implications could arise, two-thirds of those had not seen a case in practice.
- Almost three-quarters thought that the current rules might discourage or prevent those seeking to refinance using alternative finance from doing so.
- Most considered that the administrative burdens required to comply with the proposed rules would be minimal.
Next steps
As announced in the 2024 Autumn Statement, with draft legislation in Finance Bill 2024-25, from 30 October 2024:
- When a person uses alternative finance arrangements to raise capital using an asset they already own, no CGT or CT charge will arise.
- In addition, no IT or CT liability will arise on revenue receipts as a result of alternative refinancing arrangements.
- Where qualifying diminishing shared ownership refinancing arrangements are used, individuals will be treated as having owned the interest in the property throughout the period of arrangements, and neither the individual nor the financial institution will be treated as having made any disposal or acquisition for tax purposes.
- Annual Tax on Enveloped Dwellings (ATED) charges will not arise where alternative finance is used to purchase residential properties, in circumstances where this charge would not arise under equivalent conventional finance arrangements.
Changes to capital allowances rules will not be made as there was no clear evidence of real-world impacts on taxpayers.
Useful guides on this topic
CGT: How to calculate a capital gain or loss
How do you calculate a capital gain or loss? What costs are deductible? Can you set losses against capital gains?
Residential Property gains
The definition of 'Residential Property' is important for Capital Gains Tax (CGT) purposes when considering how a gain is reported, when tax is paid and the rates of tax that apply. What is a Residential Property gain?
PRR: Private Residence Relief
What is Private Residence relief (PRR)? What are the qualifying conditions? Can you claim relief on two homes? How do you claim PRR? Can you claim PRR if you develop your garden?
Simplifying alternative refinancing arrangements for tax
HMRC has launched a consultation ‘Tax Simplification for Alternative Finance’. This explores proposals to address the difference in Capital Gains Tax (CGT) treatment when property is refinanced using alternative, rather than conventional, finance methods.
External links
Consultation outcome: Tax Simplification for Alternative Finance
Policy paper: Changes to alternative finance tax rules (refinancing)
