Three changes to capital gains tax on residential property disposals are being introduced with effect from 6 April 2020 which could have a significant impact on the amount and timing of tax liabilities.
Private residence relief
At the moment, if you sell a property that’s been your main residence throughout your ownership then private residence relief applies automatically and any gain is tax free. This is straightforward, simple and isn’t going to change in the near future.
Sometimes life gets a little bit more complicated and, for example, you might move into a new property before you can sell your old one. Maybe the housing market is stagnant or has fallen, or you just want to hold on to that property for a while.
At the moment, you have 18 months to sell your property once it stops being your main residence without compromising the availability of private residence relief.
From 6 April 2020 this is being cut to 9 months.
Lettings relief
This is a major change for landlords who let a property that they used to live in as their home, or main residence.
At the moment, when you sell a property that has been your home, you can claim lettings relief which exempts up to £40,000 of gains arising whilst the property was let.
From 6 April 2020 this lettings relief is being withdrawn. There’s no transitional arrangements or gradual removal of the relief – it’s a cliff edge.
Here’s a simple example of the possible effect:
You have owned a property for eight years and during that time its value has increased by £80,000. For four years it was your home, then you let it out for a further four years prior to the sale.
If you sell on 5th April 2020 then your gain of £80,000 is fully non-taxable. Half, or £40,000, is covered by private residence relief and the remaining half, or £40,000 is covered by lettings relief.
If you sell on 6th April 2020 then lettings relief no longer applies so you have a taxable gain of £40,000. If you are a higher rate taxpayer then this would be taxed at 28% resulting in a tax charge of £11,200.
(For simplicity, this ignores the impact of any annual allowance, or private residence relief for the final nine months of ownership)
Reporting the gain and paying tax
At the moment, property disposals are notified to H M Revenue & Customs as part of the annual self-assessment Tax Return, with the Return and any capital gains tax payable due by 31st January following the end of the relevant tax year.
For disposals between 6 April 2019 and 5 April 2020 this means the Return and any tax are due by 31 January 2021.
From 6 April 2020 residential property disposals have to be reported to HMRC in a separate Return within 30 days of completion. Tax must also be calculated and a payment made to HMRC within the same 30 day time limit.
Separate Returns are not needed for no gain/no loss disposals, or where no tax is due.
Please contact me for more information about the above or any other tax queries.
