Posted by Chris Wilson, Partner
Capital Gains Tax changes April 2020
New rules in respect of capital gains tax (CGT) will come into force, for UK residents, affecting all disposals of property from 6 April 2020.
The key changes are as follows:
1. CGT must be paid within 30 days following completion of a sale or transfer of a property (instead of at the end of the following January after the end of the tax year in which the disposal took place).
2. The period at the end of ownership (previously 18 months) which qualified for principal private residence (PPR) relief regardless of the circumstances will be reduced to 9 months.
3. Lettings relief will only be available if the letting is undertaken whilst the owner continues to live in the property at the same time – i.e. if you have a lodger living with you the property will still qualify for the relief.
4. The Government has now incorporated into legislation the previous extra statutory concession that allowed for a period of 12 months (potentially extended to 24 months in exceptional circumstances) to qualify for principal private residence (PPR) relief where an individual is initially unable to occupy their new home because they are completing the sale of their old home or constructing/renovating a new home.
1. Payable within 30 days
Previously, it was not necessary to report or pay CGT until you submitted your self-assessment tax form. In some cases, this meant that CGT only became payable 22 months following completion.
6 April 2020
The chargeable gain on all disposals from 6 April 2020 must be reported by submitting a residential property return within 30 days of completion. The full amount of CGT due must be paid on the same date. If a property is owned jointly, each owner must submit a return.
This change may not pose a problem if you sell your property, but is likely to be difficult for anyone who makes a gift of property as they may not have readily available funds to cover the tax.
It also raises complications for financial settlements in divorce cases. Other assets may need to be sold to raise funds to pay CGT, prior to the transfer of any property between spouses.
Ultimately, the gain will still be recorded on your self assessment form to allow any necessary adjustment for additional tax due or recoverable. Despite paying the tax within 30 days, you cannot recover any overpayment until you complete your tax return.
Since it is dependent on yearly income, some may find it difficult to determine the rate (18% or 28%) at which they must pay CGT. This might not always be easily quantifiable.
2. PPR Relief – last 9 months
At the moment, if the property that you are disposing of was once your main residence, any gain accrued during the last 18 months of ownership qualifies for PPR relief and will be exempted from tax.
This 18 month PPR relief applies regardless of whether you are living in the property/letting it.
6 April 2020
From April 6th 2020 this gratuitous relief period is to be shortened from 18 months to 9 months.
3. Lettings Relief
PPR relief is restricted if all or part of a property has been rented out as a residential let at any time during your period of ownership of the property.
It is possible to apply PPR relief for the period during which you occupied the property, but PPR will not be available for the period during which the property was let. You must instead apply lettings relief for the rental period.
Previously the final 18 months of ownership were covered by PPR relief (however the property is used).
Lettings relief may be available where CGT is chargeable on a gain in value of a dwelling-house which has at any time during the “period of ownership” been let as residential accommodation.
The part of the gain, that would otherwise be a chargeable gain by reason of the letting, is exempt to the extent of the lower of:
- The amount of PPR relief available on disposal (ignoring letting relief)
- The amount of the gain relating to the letting period
Date of purchase: 1 January 1999
Value as at purchase: £100,000
Period as primary residence: Until 30 June 2010 (11 years 6 months)
Rental period: 1 July 2010 to 31 December 2014
Sale value: £200,000
|Gain arising on disposal:||£100,000|
|Less PPR relief (for first 11 years 6 months, and the last 18 months):
(13/16 x £100,000)
|Gain before letting relief||£18,750|
|Less: letting relief which is the lower of:
1. £81,250 (PPR)
2. £18,750 (gain accrued in letting period)
6 April 2020
Lettings relief will only be available if the letting is undertaken whilst the owner continues to live in the property at the same time – i.e. if you have a lodger living with you, the property will still qualify for the relief.
The period at the end of ownership (previously 18 months) which qualified for PPR relief will be reduced to 9 months.
Using the same worked example as previous, the result will look like this from 6 April 2020:
|Gain arising on disposal:||£100,000|
|Less PPR relief (for first 11 years 6 months, and the last 9 months):
(12.25/16 x £100,000)
|Less CGT annual exempt amount (if unused)||(£12,000)|
|CGT payable within 30 days
Basic rate tax payer (18%)
If you previously had been able to make use of the £40,000 letting relief to reduce your chargeable gain to nil, you will now be facing a tax bill of £7,200 (18%) or £11,200 (28%).
4. Delay in occupation
Previously, if your delay in occupation took 365 days or less from acquisition and you then resided in the property until its sale, your whole period of ownership would likely be covered by PPR relief and therefore exempt from CGT. However, if it took 366 days or more (but less than 24 months), the initial period of ownership would not necessarily count. It would be up to HMRC’s discretion as to whether they felt that the delay amounted to “exceptional circumstances”. If they did not, then none of the period before the tax payer moved into the property would be eligible for PPR relief.
This could lead to a significant tax liability.
This period is now extended to 24 months in all circumstances. This gives greater clarity for the tax payer.
As always, there are other conditions that apply in relation to delay in occupation and care should be taken to ensure that the specific circumstances fall within the scope of the new legislation.
For expert advice on capital gain tax rules please contact our Private Client team:
0800 923 2070 Email us
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