09 Sep New Capital Gains Tax Rules Effecting Residential Property Sales
HMRC are introducing some significant changes to the Capital Gains Tax (CGT) rules relating to the sale of residential property which will come into effect from 6th April 2020. These changes will affect three main areas; Principal Private Residence relief, Lettings relief and timescales for reporting disposals and payment of tax. If you have a residential property which you are thinking of selling, it is important to understand how these changes will affect you.
Principle Private Residence (PPR) Relief & Lettings Relief
PPR relief is intended to prevent individuals from being liable to CGT when selling their only or main residence. HMRC are, however, introducing legislative changes to two of the ancillary PPR reliefs which shelter property disposals from CGT regardless of occupancy, to better focus PPR at owner-occupiers.
Final Period Exemption:
Under the current provisions the final 18 months of ownership of a dwelling which is, or has been, a person’s main residence is exempt from CGT under PPR. This exemption was intended to ensure that relief was not lost when there were delays in selling a property after leaving it, however, it does allow individuals to accrue relief on more than one property at a time. As such, HMRC will reduce the ‘final period exemption’ from 18 months to 9 months from April 2020.
This change will be particularly relevant for those who have already purchased and moved to another property prior to selling their main residence or those who are selling a property which was their main residence in the past and has since, perhaps, been rented out as this will increase the portion of any gain chargeable to CGT if there is a delay in selling in excess of nine months.
Currently the Lettings Relief provisions provide additional relief of up to £40,000 per person (or £80,000 per couple) where a property which has been their main residence at some point and then been rented out, is sold. This relief was introduced to allow people to be able to rent out their spare rooms without suffering negative tax consequences, however, is now mainly used in cases where the entire property has been rented out. From April 2020, the relief will change and only be available to those who are in shared occupancy with their tenant (i.e. where a spare room is rented out whilst the owner still occupies the property).
In real terms the changes mean that almost nobody will qualify for the relief going forward and it is worth noting that there will be no accrued relief or apportionment of gains to before/after the rule change. As a result, anyone selling a property which was previously their main residence and was then let out will lose all lettings relief if the property is not sold before April 2020.
Capital Gains Tax Reporting & Payment:
In addition to the computational changes, HMRC are also reforming the way that disposals of residential property are reported and the relevant tax payment deadlines from April 2020. Whereas currently any disposals would be reported, and tax paid, via the self-assessment tax return due by 31st January following the end of the tax year of the disposal, under the new rules any disposals will need to be reported and tax paid within 30 days of completion.
These rules will apply to all residential property disposals which are not fully covered by PPR relief and brings the procedures in line with those already in place for non-UK residents.The general rule will be that a return in respect of the disposal must be delivered to HMRC within 30 days and a ‘payment on account’ made at the same time; this will take into account any unused losses, annual exemption and a reasonable estimate of the individual’s taxable income in the year.
Our specialist Tax Planning team can help you to best understand how these changes could affect you. If you are looking for help and advice on any of the above information, please get in touch with Natasha Gray, a member of our Advisory Department, on firstname.lastname@example.org or 01573 225 082.