The beginning of a new tax year is, for many clients, a key opportunity to review their personal and business tax affairs. In particular, this allows clients to ensure that they take advantage of the tax allowances during the tax year ahead.
The Government has announced that there are several changes to Capital Gain Tax (“CGT”) which are coming into effect from 6th April 2020. If you own properties in addition to your main residence, or are a buy-to-let landlord, these reforms may have a significant impact on the CGT liability incurred when selling or gifting a second property from that date onwards.
Reporting obligations
Under the rules prior to 6th April 2020, a CGT liability arose on the gain in value of a property which was being disposed of, whether that be by sale or gift. The taxpayer had to report the gain in value and any CGT due in their annual self-assessment Tax Return, which is submitted to HMRC with the payment of CGT due before 31st January following the tax year in which the disposal was made.
However, from 6th April 2020, the taxpayer must submit a stand-alone return within 30 days of the disposal using HMRC’s new (trial) online CGT reporting system, with a provisional calculation and pay the tax arising on that calculation. The CGT payment made on reporting will be treated as a payment on account.
The gain will still need to be included in the taxpayer’s annual self-assessment Tax Return in the normal way, at which point the figures can be confirmed and any necessary adjustments made. This may result in taxpayers paying more CGT than necessary upfront if, for example, the property can benefit from the lower 18% rate (rather than 28%) but this will not be known until the annual Tax Return has been submitted.
For the avoidance of doubt, in the transition period, HMRC has confirmed that if contracts for sale were exchanged before 6th April 2020 but an unconditional completion takes place after that date, then the old reporting rules will apply to the disposal.
Going forward, taxpayers owning second properties should ensure that they are prepared to report a disposal before the 30-day deadline, and that they have sufficient cashflow to pay any CGT due at that point.
Private Residence Relief
Private Residence Relief (“PPR”) is designed to prevent individuals paying CGT on any gain incurred on their main residential property. Before 6th April 2020, this relief was available on the final 18 months of ownership, even if the owner had moved out during that period.
From 6th April 2020, the exemption period will be reduced from 18 months to 9 months and will therefore result in a greater potential CGT liability being incurred for the ownership period. This reform is intended to ensure that the relief achieves its sole purpose of benefitting true owner-occupiers. However, the extended relief for disabled occupants of 36 months will remain the same.
Lettings relief
Before 6th April 2020, the position was that a property owned and occupied as a main residence and subsequently let out could benefit from a potential relief of up to £40,000 on any gains (or £80,000 if the property was jointly owned with a spouse or civil partner) when sold.
However, from 6th April 2020 this relief will only apply when the owner in is occupation with the tenant. This means that the relief will only be available to a much more limited pool of landlords and will open many up to CGT liabilities on the disposal of second properties.
What can be done?
If you are considering selling or gifting a property which you previously occupied as your main residence, then you should take particular care to ensure that you understand the impact of the new rules.
The impact of these changes will be greater if the gift or sale relates to a property whereby PPR may apply or lettings relief would previously have been available. Advice should be taken to ensure that the correct reporting process is used and that the correct reliefs are applied to the disposal.
Our team of experts are on hand to advise you on the CGT implications of a disposal by sale or gift from 6th April 2020, and also on other related estate planning issues which may be applicable to your circumstances. We work closely with a network of trusted accountants who can assist with preparing Tax Returns on your behalf.
If you have any questions regarding the above information, or any general Private Client related inquiries, please get in touch with your existing Seddons’ Private Client solicitor, or Head of Private Client, Stuart Crippin, at [email protected], or 020 7725 8056.