Anyone who incurs a taxable gain on residential property will see a significant change in the time they have to pay their capital gains tax when new legislation comes into effect on 6 April 2020.
The new rules mean that from 6 April 2020 you will have a 30-day deadline from completion of a sale to calculate the gain, report it and pay it to HMRC. Currently, depending upon the timing of the sale, capital gains tax is due anything between 10 months and 22 months after completion of the sale.
Furthermore, the new ‘residential property return’ will be a standalone return to HMRC, which it expects to be submitted online, unless you fall within certain defined groups, where it is not reasonably practicable for you to use digital tools. Anyone without a government gateway online account will need to apply for one, which can take up to 10 working days to be issued (and sometimes much longer in busy periods) and this time delay should also be factored in.
This payment is effectively a ‘payment on account’ and the gain will still need to be reported on a Self Assessment tax return, when the final tax will be calculated with any underpayment of tax due by 31 January after the tax year in question.
Will you be affected by the changes?
Homeowners that will be affected are those selling second homes or buy-to-let properties. Your main residence is unlikely to be liable for capital gains tax, as it is usually covered by Private Residence Relief, unless it was rented out at some point during ownership, or an additional home was elected as your main residence at some point during ownership.
Property owners will need to have their records up to date in advance of a sale, so that the 30-day deadline can be met and any potential penalty charges avoided.
Details that will need to be provided including the date the property was acquired, purchase and disposal costs, such as legal and surveying fees and costs of eligible home improvements, undertaken during the period of homeownership. In some circumstances, a professional valuation may also be required. You will also need to have a clear understanding of your earnings in that tax year also.
The amount of capital gains to be paid will depend upon which tax band you fall within and charged at either 18% or 28% (or a combination of the two, if this gain pushes you into a higher tax band). There is currently a tax-free capital gains allowance of £12,000, however, if you have disposed of any other assets in the same tax year, part or all of this may have already been utilised.
If you have let your main residence for part of the time you owned it or moved out for a long period before selling, the rules to calculate the capital gain can be more complicated.
Further complications for homeowners
Furthermore, rules surrounding Private Residence Relief and Letting Relief are also changing significantly on 6 April 2020 which affect how these tax liabilities are calculated.
Private Residence Relief
Private Residence Relief is currently available when you rent out a property that was once your main residence, Private Residence Relief is available for the amount of time you lived in it, together with an 18 month grace period up to when you sold it, regardless of whether you lived in the property during this period or not, even if it was rented out during this period.
This means that if the value of your property has increased since you purchased it, you only pay capital gains on the remainder of the time, as a percentage of the increase in value, less any tax allowable purchase and disposal costs. From 6 April 2020, this relief was reduced to just 9 months, effectively halving the grace period immediately before a sale.
More significantly, Lettings Relief is being withdrawn from 6 April 2020. This relief is currently worth up to £40,000, per person, per property. Lettings Relief is available, in addition to Private Residence Relief, for properties that were once your main residence. This sizable relief is the lower of the amount of private residence relief available in respect of the letting, £40,000, or the amount of the gain arising by reason of the letting.
Exceptions to the changes are the 36-month period that PRR is available for disabled persons, or those in a care home, which will remain. Lettings Relief will only be available where the owner of the property is in shared accommodation with a tenant.
These two changes could mean that you could be liable for a considerable tax bill if you do not exchange contracts on a property before the end of the tax year (for tax purposes, it is the date of exchange, not completion that is the key date to determine when a property is sold). Under the current arrangements, even a considerable increase in a property’s value could result in a nil capital gains tax bill once these two allowances have been factored in.
Contact us for advice today
The calculation of capital gains tax when disposing of a property can be complicated at the best of times, with the complex rules surrounding Private Residence Relief and Lettings Relief also changing at the same time, this presents many people with a minefield to navigate.
The revised, considerably shortened timeframe will leave the calculation of capital gains as an afterthought for many. We regularly provide specialist tax advice on this matter to both individuals and solicitors and would advise anyone disposing of such property to take advice from a professional tax advisor early, in advance of the completion of a sale to allow adequate time to analyse all the required information. For more information and advice, contact our tax team on 0161 832 4841 or email firstname.lastname@example.org.