Major changes to the way that Capital Gains Tax (“CGT”) is collected are coming into force from April 2020 which coincides with a number of other changes which could increase the amount of tax due on residential property sales.
Those with rental properties, second homes or properties they no longer live in as their main home should consider what effects the new rules have on them.
30 Day Reporting and Payment
From 6 April 2020, disposals of UK residential property must be reported and any tax paid within 30 days of the completion date. This is a major shift from the current payment date of 31 January following the end of the tax year of disposal.
The disposal must be reported on a ‘residential property return’ and the tax paid within 30 days. Where you sell a property in which you have lived as your main residence and Private Residence Relief (“PRR”) reduces the gain to nil, or the disposal is a transfer between spouses or civil partners, no return will be required but the rules on these reliefs will also change from 6 April 2020 – see below.
HMRC have confirmed that a £100 fixed penalty will apply where the filing deadline is missed, with additional penalties accruing if the failure continues past 3 months.
It is also worth noting that taxpayers who complete self assessment tax returns will also need to include the details again on their year end tax return, doubling the reporting requirements for some taxpayers.
Loss of Exemption
From 6 April 2020 the government will further reduce the deemed occupation period allowable under PRR and remove Lettings Relief. These measures could considerably increase the amount of CGT an individual will pay following the sale of a property which was previously used as their main residence.
Generally any gain realised on selling your home is exempt from CGT. The exemption applies to the period you are living in the property and also the final 18 months of ownership if you move out before you sell. This final period exemption was originally 3 years being introduced during a slump in the property market to assist people struggling to sell their former home after moving on to another. The exemption was reduced from 3 years to 18 months in 2014. However, from 6 April 2020 the final period exemption will reduce to just 9 months which given the current property market seems counterintuitive.
Perhaps more importantly, a further relief known as Lettings Relief is to be effectively abolished from 6 April 2020 (unless you continue to reside in part of the property which is being rented). This is a valuable relief for people who let out their former main residence which can reduce the gain on sale by up to £40,000 for each owner.
The withdrawal and restriction of these reliefs could result in individuals paying over £12,000 more in CGT if a property is sold after 5 April 2020. As relief is available per individual married couples could be in excess of £24,000 after 5 April 2020.
Example
A common scenario would be an individual purchases a property in 2000 in which they live for 10 years. They then purchase a new property to move into, retain the first property to let out and obtain a small rental income from.
In 2020 they are looking to sell the first property which has risen in value by £100,000.
If the sale concluded before 6 April 2020 their tax liability would be, at most, £700. However, if it concluded after 5 April 2020 their liability would have risen to £12,950.
Planning Opportunities
There are, however, ways to protect this valuable relief as long as planning is undertaken in advance of the tax year end. If you are considering selling a property in which you have lived and rented we would strongly advise that you contact us to consider if there are any planning opportunities available.
If you'd like information or advice about the new Capital Gains Tax relief, please get in touch with Scott McIver on 01387 955962 or email scott.mciver@armstrongwatson.co.uk.
