If you own a residential property, then you need to be aware of several Capital Gains Tax changes that are being introduced with effect from 6 April 2020.
There are three main changes:
- Changes to the timing and method of reporting capital gains on residential property and paying any Capital Gains Tax (CGT) that is due.
- Changes to the final exempt period that will qualify for Private Residence Relief.
- Changes to the Letting Relief exemption.
We will look at each of these changes in turn.
1. Earlier payment of Capital Gains Tax (CGT) on residential property
Under the current system, disposals of residential property by UK resident individuals are included on an individual’s Self-Assessment tax return for the year of disposal. Consequently, the CGT due becomes payable on 31 January following the end of the tax year in which the disposal is made.
For CGT purposes, the date a disposal occurs is the date of exchange of contracts. For example, if an individual sold a property on 1 August 2019 the gain would be shown on their 2019/20 Self-Assessment tax return and the CGT due would be payable on 31 January 2021.
Now, new rules are being introduced for disposals of residential property that take place on or after 6 April 2020. Under these rules, an individual will be required to make a return within 30 days of the date of disposal (using the completion date rather than exchange of contracts as the trigger date even though exchange of contracts is the date of sale for CGT).
No returns are required for no gain/no loss disposals and for disposals where no tax is due.
Tax must be calculated and paid on the disposal (ignoring any other CGT disposals which are not subject to these rules). The tax is due on the date that the return is due; that is, 30 days after the completion date. The tax is referred to as an ‘amount notionally due’.
The gain will then also need to be shown on the individual’s Self-Assessment tax return in the usual way. The total CGT payable for the tax year will be computed taking into account all gains and losses in the year. Credit will then be given for the notional amount already paid. If an overpayment arises this can be refunded.
The effect of this change is to dramatically shorten the period between selling a property and paying the tax. As a comparison:
- A sale on 1 April 2020 – tax payable 31 January 2021
- A sale on 1 May 2020 – tax payable 31 May 2020
So, from a cash flow perspective, individuals may be better off selling sooner rather than later (assuming that they have not already used up allowances in the 2019/20 tax year).
Please note that a disposal for CGT purposes includes gifts where there is no consideration, so these provisions apply equally to transfers to family members as they do to actual sales.
2. Reduction in the final exempt period that will qualify for private residence relief
Under the current rules, a property that has previously been your main residence for the last 18 months of ownership (even if you were no longer living there) qualified for Principal Private Residence Relief (PPR) and was thus exempted from tax.
For disposals prior to April 2014, this period was 36 months.
Under the Capital Gains Tax changes coming in on 6 April 2020, this 18-month period is being halved to nine months.
3. Changes to the Letting Relief exemption
Changes are being made to the rules that apply where an individual sells a property that has, at some time, been their main residence but has been let out.
Under the current rules an individual benefits from:
- PPR relief for the periods when the property was actually used as their main home and the last 18 months
- Relief for the period when the property was let, up to a maximum of £40,000 of relief.
Typically, this applies where an individual was living in property A, then moves into property B but keeps property A and lets it out.
Under this scenario, on the sale of property A under the current rules:
- The period when the individual was living in property A would be exempt
- The last 18 months would be exempt
- There would be a further exemption, up to a maximum of £40,000, for the let period.
In many cases, this further letting relief meant that no CGT was payable on the disposal.
Under the proposed new rules coming in on 6 April 2020, Letting Relief will only be available for periods when the owner lived in the property at the same time as the letting.
This new rule will apply to the whole period of ownership so there will be no relief for letting periods unless there was shared occupancy, even for those letting periods prior to 6 April 2020.
What this new rule effectively means is that letting relief will only be available for those individuals who take in lodgers into their own home. It will not be available for those letting out their former home.
In practice, what this means is that if a person sells after 5 April 2020, they will lose Letting Relief (a maximum of £40,000 at a rate of 28% = £11,200; possibly double if jointly owned) and also some PPR for the last period.
Get in touch
If you have any questions about how these CGT changes may affect you, please get in touch with your usual RPG contact or call us on 0161 608 0000.
Production
