Over the past five years, HMRC have increasingly targeted landlords and homeowners with a series of restrictions on tax reliefs. Few areas of property tax have been left unscathed with the changes impacting Income Tax, Capital Gains Tax (CGT) and Stamp Duty Land Tax to name a few. The sheer volume of changes would leave even the most tax savvy of property entrepreneurs struggling to keep up.
In particular, proposed amendments to CGT reliefs in respect of selling a residential property from April 2020 may see taxpayers facing unexpected bills, along with tighter filing deadlines.
What is Capital Gains Tax?
CGT is charged on the disposal of an asset if a profit or ‘gain’ is made. Each tax year, most UK resident individuals can make a certain amount of tax-free gains before they have to pay CGT. For 2019/20 an individual may make £12,000 of tax-free gains.
Broadly the rates of CGT are either 10/18/28% but this is entirely dependent upon the type of asset, and the individual’s income tax bracket.
Changes to main residence relief
If an individual sells their home, provided they have lived there throughout the time they owned it, there will potentially be no CGT due to main residence relief, officially known as ‘Principal Private Residence’ relief (PPR).
In order to qualify for this relief, the property being sold must be the taxpayer’s main residence. Where a property has not been the taxpayer’s main residence for the whole period of ownership, the duration of ownership is apportioned and may be exempt if certain conditions are met.
Importantly, the last 18 months of ownership are exempt, even if the property is not occupied at this time. However, the government intend shortening this final exemption period from 18 months to 9 months from April 2020 (subject to special cases). The impact of these changes will depend on the individual’s overall period of ownership and their level of capital gain.
Changes to Lettings Relief
Lettings Relief is available for those letting out a dwelling that has, at some stage, been their main residence. If an individual lived in the property as their main residence at any point, they may have been eligible to claim up to £40,000 of lettings relief if they let out all or part of their home. The relief can be particularly useful for jointly owned properties because it is available to each owner, potentially giving a couple combined relief of £80,000.
HMRC intend to restrict lettings relief from April 2020 to cases where the owner is in shared occupancy with the tenant. From that date, only those periods where the owner was in shared occupancy with the tenant will qualify for lettings relief. Periods when it was let out before then will not qualify for any relief.
The intended changes to lettings relief may potentially cost a higher rate taxpayer couple up to £22,400 of CGT if they do not sell their house before April 2020.
30-day payment changes
The above changes to PPR and lettings relief coincide with the new 30-day reporting requirement for residential property disposals.
Currently, capital gains on the disposals of UK residential properties by UK residents is to be reported on the individuals next personal tax return. For example, a disposal on 30th March 2020 would not need to be reported until 31st January 2021 when the 2019/20 tax return is due for filing. The associated CGT would also due by the filing deadline.
It is intended that from 6th April 2020, any CGT payable on sale of UK residential property will have to be calculated, and the associated tax paid, within 30 days of sale completion. That means only 30 days for the taxpayer to gather the relevant information, work out the profit, and pay the tax.
In light of the increasing complexity of tax rules on residential properties professional advice is essential when planning a property disposal. Failure to adequately plan ahead may result in a surprise tax bill along with late filing and payment penalties from HMRC. If you need advice about the tax implications of selling your property, please contact us.
Materials discussed in this publication provide general information only and should not be acted on without professional advice. Neither Exchange Accountancy nor the contributors accept any liability for any direct or indirect loss arising to any person acting or refraining from acting as a result of any material in this publication.