Capital Gains Tax Changes on residential property

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Significant tax changes will take effect from 6 April 2020 in relation to the taxation of UK property, effecting Capital Gains Tax (CGT) payments

It is imperative that individuals are aware of these changes, and their revised obligations, otherwise they may come as a nasty surprise.

30 days reporting and tax payment deadline

Prior to the 6 April 2020, CGT arising from the sale of a UK property would have been payable on 31 January following the end of the tax year of the sale. For example, if you sold a property on 12 December 2018 (the date of exchange), the CGT would have been payable on 31 January 2020.

The new rules will mean that any CGT payable on the sale of a UK property will need to be paid within 30 days of the completion date.  This means any property with an ‘exchange of contracts’ date after 5 April 2020, will be subject to revised reporting and tax payment deadlines. In addition, a return must be submitted to HM Revenue & Customs (“HMRC”) reporting the gain within 30 days of the completion date, unless the property is sold on a no gain / loss basis or if there is no CGT to pay. If the deadline is missed, interest and penalties will be charged.

It’s worth mentioning that where a property has been occupied as an individual’s main residence, CGT is unlikely to arise on the sale of the property. These changes will primarily impact individuals with more than one property.

This change will dramatically impact individuals who sell property within the early part of the 2020 tax year

Currently, there can be a delay between the capital gain arising on the sale and the actual payment of CGT of as much as 22 months, i.e. if a gain is made by a UK resident individual on 6 April 2019, the CGT is payable by 31 January 2021.  Under the new rules, the CGT due on a gain arising exactly a year later would be payable by 6 May 2020 i.e. selling a property on 6 April 2020 means you would have to pay GCT on 6 May 2020 – over a year earlier than the current rules.

HMRC accept that it may not be possible to calculate the exact amount of CGT due within 30 days of completion, particularly as the rate of CGT applicable (18% or 28% for 2019/20) to the disposal will be dictated by the taxpayers’ other taxable income and gains.  A ‘reasonable’ calculation must therefore be made and the full CGT payment made ‘on account’.  For those already within the self-assessment regime, the capital gain must be reported (again) on their self-assessment tax return, as it currently would be, with any CGT variance adjusted via the usual self-assessment payment / repayment mechanism.

Looking back

Similar legislation was initially rolled out in 2015 for non-UK resident individuals selling UK residential property. This was extended to non-UK residents holding any type of UK land or property in respect of gains which accrued from 5 April 2015 for residential property and 5 April 2019 for non-residential property. This also applies to UK land and property held within a company, or other ‘wrapper’, after 5 April 2019.

In addition to the changes to capital gains tax on the sale of properties, the 6 April 2020 will also see changes to private residence relief

Often referred to as PPR, private residence relief, includes the provision for ‘deemed’ occupation for the final 18 months of ownership where a property has been occupied as a main residence at some point. During this deemed period of occupation, the individual need not physically occupy the property, so long as they have at some point during ownership. This deemed period was previously 36 months and was reduced to 18 months by the Finance Bill 2014.

From 6 April 2020 the final period of deemed occupation will reduce from 18 months to nine months. Any property sold after 6 April 2020 will only be able to claim nine months PRR. Clearly this has the potential to create a CGT liability on the sale of property taking place after 6 April 2020 which would have otherwise been covered by relief in full under the existing rules.

The final changes being introduced on 6 April 2020 relate to lettings relief

Where a property disposal qualifies for private residence relief (PPR), it may also be possible to obtain lettings relief. This relief can be an incredibly valuable additional relief for periods where a property has been let and can be worth up to £40,000 each for a couple, exempting up to £80,000 of capital gains for jointly owned properties.

With effect from 6 April 2020, the availability of the relief will be dramatically curtailed and will only be available to owners who share occupancy with a tenant i.e. they let out a spare room or similar. Any periods where the owner has moved out of the property and not shared occupancy will not be covered by the relief from April 2020.

At Paradigm Norton we have a multi-disciplinary team who can provide you with a holistic approach that combines accountancy and tax requirements with your financial planning. If you would like to speak to the team about the matters raised in this article please give us a call today on 01275 370670. We would love to hear from you.

Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change in the future.

This article has been published for educational purposes only and should not be considered investment advice or an offer of any product for sale and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. The Financial Conduct Authority does not regulate tax planning.